There is more risk to the US markets than to emerging markets right now, Punita Kumar Sinha, Founder, Managing Partner 66839440 66826409 66824625 & CIO, Pacific Paradigm Advisors, tells ET Now. Sinha, who has a doctorate from Wharton and is the wife of central minister Jayant Sinha, has had a three-decade long career as an investor, says the markets are discounting a tariff increase against China by US as of now. Edited excerpts: What is your current market view? We have seen a gut wrenching fall in crude, a good comeback in emerging market equities together with a lot of volatility in developed markets like US and Japan. How do you assess the risk versus reward ratio for investors? First of all, there is more risk to the US markets than to emerging markets at this point in time. Of course, there is an event risk with respect to China and what happens in the meetings between President Trump and Chinese Premier later this week. That is going to be an event risk that nobody can forecast. But barring that, there is more risk to the developed markets particularly the US than to emerging markets. And that is mainly because of the valuation disparity between the US market and the emerging market valuations. The US markets are trading at roughly 50% premium to the emerging market valuations, the highest ever in last two decades. We saw these kind of disparity levels in 2002-03. We are now closer to 2008-09 levels and we have noticed in the past that this gap always closes. Sometimes it may take longer, sometimes it may take shorter and over the last one month, we have started seeing emerging markets outperform the US. That trend is likely to continue. Given where the valuations are, there is much less risk barring the event risk I talked about to emerging markets than to the US markets. There is so much chatter around what is going to happen when Xi Jinping and Trump meet. Do you think there could be any headway and a truce can be called? There is a lot of nervousness and if the tariffs are raised to 25% as is currently the plan, it is going to be negative not just for China, but also for the US because it is going to be inflationary and that could have an adverse impact on inflation, interest rates and lead to some kind of slowdown. Morgan Stanley has already factored in the US slowing down. Their forecasts are showing that US is going to slow down quite dramatically over the next two years in terms of the economic growth and they are factoring in a higher tariff than where it is today. But frankly nobody can get into President Trump’s head and know what he is going to do. If the tariffs are not increased, that is obviously going to create some positive sentiment because right now, the markets are discounting a tariff increase. The consensus that is building indicates that one is approaching 2019 with a bit of caution. Yes, you have to approach 2019 with a bit of caution, especially in the US. Not only are we seeing valuations at elevated levels, but we are also seeing risk to growth. Right now, what is factored in is that the Fed will continue to raise rates. There is definitely cautiousness on the US side. On India, there is cautiousness more because of elections but in terms of valuations, some of the midcaps are now discounting a lot of the negatives. Right now, largecaps are a safe bet but the Indian markets are trading at a higher premium to other emerging markets than historical levels. Also, the largecaps in general have got pretty high valuations and India’s own historic valuations versus today were much lower. There are some risks building up in pockets in India but a lot of value is emerging at the same time. While you are sitting in India, it looks like India has done quite poorly as a market but on the basis of year-to-date performance, India after the rebound in the last few weeks, is not performing as badly as some of the other markets like Korea and China and some of the other emerging markets.Are you making a case that cash could be king in 2019? Should one sit on more cash than in last three years? Yes, I think you have to. I would not go fully into cash. SIPs are a good way to play the volatility in the markets and there is going to be some volatility. I would not go totally into cash because there are a lot of event risks including the elections in India. If the elections throw up a majority, then holding cash is not going to be a good thing. You have to be invested but at the same time maybe a bit more cautious in terms of increasing cash levels. But I would not recommend going fully into cash. Markets tend to price in a lot of scenarios in advance. The focus is not on where the buck has moved, but where the buck would move. The scenario which you have painted could be the perfect play out scenario for 2019. But is it already in the price? I do not think it is in the price. I believe it has started to play out over the last one month and is yet to fully play out. Also, there could be some more Fed rate hikes. Of course, President Trump is coming down hard on the Fed chairman. So, we do not know how that will play out. But if the economy slows down more sharply than anticipated, then the Fed will have to pause. But at the moment, the Fed is likely to keep raising rates because we are at full employment and there is a high risk of inflation rising in the US because of protectionism. In India, after the midcap selloff, the macros have come supportive again. Would that cushion sentiment and build a case for buying at these levels? Definitely, value is emerging in the midcap sector. We are also seeing a lot of distress sales by NBFCs and therefore there are a lot of assets for sale in India. There will be a lot of competition for capital because there is distress beyond the midcap space. Even in the unlisted space, we are seeing a lot of deals coming up that would need capital. We have to see how the competition for capital plays out. Wherever there is value, there is an opportunity to make money longer term.Is there a lot nervousness around the state elections because in some ways they are being looked at as the semi-finale to the 2019 general elections? While the state elections are definitely being watched, I am not sure they are going to necessarily be a precursor to what we see in the general election. In the general election, you are definitely voting for a prime minister whereas in the state elections you are voting for a chief minister and those candidates can have different pulls in their communities. While the state election outcome is important, it is necessarily going to be the same way in the general election.You are not sounding all that bullish but yet you are able to spot value in the midcap space. Have you added in this decline? If yes, what are the themes on your radar? The current correction has thrown up decent value in some high quality NBFCs. The capex cycle seems to be reasonably robust, particularly with government spending. There is some opportunity in the capital goods space but one has to be very selective. The large banks are fairly well positioned on valuations and are able to buy a lot of the NBFC portfolios at very high discounts. That is another place where the valuations, particularly of some of the large PSU banks, are very attractive. You have to be stock specific in most of the other sectors. In a defensive market, typically one tends to move to high dividend yield pharma and IT, etc, but some of these sectors have already played out and one has to be very company specific, particularly in pharma. Right now, the action seems to be more in financials and select midcap stocks. Coming to consumer space, there is talk about Nestle buying Horlicks at very steep valuations. Consumer is a an expensive story in India, but at any given point in time, they always have enough takers. In India, either you can make a lot of money trading or you can make a lot of money in buy and hold. You need to have a little of both. You also need high quality companies in your portfolio and consumer companies tend to have decent ROEs. But they are not the kind of companies where you can expect to make a lot of money over the next six months to a year. But these are steady growth companies and valuations are always high. You always need to have some of those in your portfolio but you have to hold them for long term. You also have to be very patient because there can be periods of cyclical recoveries when these will underperform. But if you keep holding them over a long period of time, you will probably do okay.Indian markets have managed to outperform this fall, I mean China has just gone through a downward spiral. There are issues with other emerging markets as well. Could attractiveness compulsion be at play here and is India in that bracket right now? I would not say it is compulsion. HSBC just came out with a report on the world in 2030 and this is what global investors are seeing. China is going to be the number one economy at $25 trillion, US a close second and India a far third at about $5- 6 trillion. So the gap between the Indian economy and the Chinese and the US economy is going to remain very high but India is going to overtake a lot of other developed markets. India has a lot of potential to be one of the top economies in the world and it is also less affected by all the protectionism risk that we are seeing. That itself is going to be a driving force for investors to continue to be investing in India. There are smaller markets that also need to be looked at in the south-east Asia region because the Chinese risk can be hedged to some extent and the Chinese themselves are hedging by moving a lot of facilities and the companies in the US are also beginning to have a lot of facilities in Vietnam and in other south-east Asian countries to offset the tariff protectionism that is coming towards China. There are actually reasons. It is not just that it is going to be because there is nothing else to invest in but there are legitimate reasons why people will gravitate to these markets.
from Economic Times https://ift.tt/2zvRGAR
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