Indian Mid Caps Are Now Extremely Expensive, Says Mark Matthews

On a valuations basis, the market is no longer cheap. It is not at its historic highs either. But I would not argue in favour of the market going up, purely based on valuations. Where I think the market can continue to go up is because of the inflows that we have experienced from retail investors into domestic mutual funds. I believe that will remain strong, including through systematic investment plans (SIP). Last month we had $2 billion flow into domestic equity funds and that more than offset the foreign selling. So on a valuations basis, the market may not rise but on a liquidity basis, the market will continue to rise.

Its the overall questioning of the so-called reflation trade which was the most popular trade since, approximately, the time of U.S. Presidential Election last November and that trade really favoured commodities and emerging markets. Although the timing was coincidental with the U.S. election, I believe the origin of this trade was China. Last year, China injected some tremendous amount of liquidity into its economy. They have started taking that away and I don’t understand the linkage between that and the sudden fall from grace of cyclicals. But that is what’s happening, and emerging markets are linked to cyclicals.

The earnings we’ve seen so far have been just fine. I have not seen analysts revising down their forecasts a lot, neither have I seen them revising their forecasts up a lot. It’s the same trend in most other emerging markets. In China, we are seeing earnings coming in just in line. What should cause earnings to be more robust for the overall market are banks and commodities, the base effect from their very poor earnings this time last year is what should produce double-digit earnings growth this year.

It’s positive. The Cabinet and the president have approved these amendments which will allow the RBI to sit down on the table with the state banks and the defaulters. And they have made a promise or a guarantee, whatever you want to call it, to the managements of these state-owned banks that there won’t be any witch-hunts against them in the future. If these NPLs are written-off at prices today, nobody can come back and accuse them of having accepted too low a price. Also talk about a bad bank being created is very important to take these NPAs off the banks’ books. So yes, it’s a big step in the right direction.

Very much the same opinion. Mid caps are now extremely expensive in India at about 25 times price-to-earnings. The broader market is around 18. So I agree with those mutual fund managers, mid-cap stocks are overpriced.

We talked about banks, but the logical conclusion of that conversation is that banks will benefit from a more speedy resolution of their non-performing assets on the setting up of a bad bank. I believe they are already more than halfway through their write-offs because of the efforts of former RBI Governor Raghuram Rajan .

This is now an interesting topic of conversation because the commodity sector has seen such a sudden fall from the grace. But we need to separate the commodities. Each one has their own special supply-demand dynamic, but we don’t have the time to do that now. So I would just saw there is oil and there is everything else, to be simplistic. You did mention oil price about $45. I think it’s close to capitulation. I don’t see it going down much below from here. The reasons that have driven it down are the idea that non-OPEC countries will start increasing their production, the U.S. has already been increasing its production quite aggressively. But the counter-force is that the global economy and demand are quite robust. The other commodities – iron ore, copper, steel, nickel – they went up quite a lot and are now all collapsing. That I find more mysterious. Because we all really know why they went up as fast as they did at the end of last year, and beginning of this year. I don’t think any analysts were predicting it. So now that they are collapsing, we don’t entirely understand it either, but the answer must come out of China. The tightening that has gone on in China, that’s being blamed as the culprit, doesn’t look excessive to me, not excessive enough to warrant these big decline in prices. So I am not recommending to step in and buy commodity producers just yet. But even at today’s prices for things like iron ore, companies like BHP and Rio are tremendously profitable. The next step will be to look at buying those. Not just yet though.

On the French elections, right now the polls are showing that Macron is in the lead by 20 points which is a massive lead, much wider than the Brexit. But we were also being told that Hillary’s lead was that wide, and look what happened. So the problem is, these numbers may not be accurate, we just don’t know. That’s all I can say about it. Of course, if he wins, you are probably going to see a continued rally in the euro and the European markets. If Le Pen wins, their reactions, at least initially, will be quite the opposite. Even in the unlikely event that she is the president, she will not have the power on her own to say France is going to leave the European Union, or France is going to leave the euro zone. For such an important issue, they would have to hold a vote. And I strongly believe the French would not vote in favour of either of those. So, there would be a selloff on her being elected, but it might be quite short lived.