Markets likely to be higher over the next two-three years: Vaibhav Sanghavi

Vaibhav Sanghavi
Inversion of the US Treasury yield curve and the possibility of the world’s largest economy entering a recessionary phase triggered a fall in equity markets across the globe last week. However, the recovery was equally swift. VAIBHAV SANGHAVI, co-chief executive officer, Avendus Capital Public Markets Alternate Strategies, tells Puneet Wadhwa that looking at the economic data, the US still seems far away from a such a phase. Edited excerpts: 

Have the global markets overplayed the fears of a possible US recession?

Historical correlations on inversion of the yield curve and recessions are strong. One cannot ignore this. However, a recession is extremely difficult to predict in the new age economy, where monetary and fiscal tools are used extensively in anticipation, and not as a reaction. As of now, the US may still be away from a recession.

Is India a ‘buy on the dips’ market?

For us, 2019 was always likely to be a tale of two halves, wherein the first half was expected to be volatile and difficult, which has been till now; and the second half constructive. What happened in recent months reinforces this. Globally, rates have topped out with better-than-expected liquidity environment on weak global growth. With some clarity on the elections and recovery in corporate earnings aided by lower rates and better liquidity, India’s growth is likely to be resilient. Given this, the markets are likely to be higher over the next two-three years.

Your outlook for foreign flows?

Foreign flows to India have been moving in conjunction with the overall emerging market (EM) flows. It is also aided by dovish global interest rates outlook and benign liquidity environment. In such an accommodative risk-on environment, the flow from passives is supportive, which is what we are currently witnessing. Once shorter-term uncertainty around the elections is over, active funds will also start allocating, leading to a more stable flow. The risk factor would be the ever-changing global variables that can affect the shorter-term flow.

What has been your investment strategy over the past few months? 

Since we are a risk-adjusted return fund, we generally are cautious on big binary events like an election. We take exposures to the market, albeit with a relatively higher hedge. Market valuations are very diverse, and it would be wrong to look at valuations only at the benchmark indices. Broadly, valuations are fair and going ahead, the markets would follow the earnings growth rather than price-to-earnings (P/E) expansion.

Is a slowdown in global growth a concern for the markets?

Globally, the growth forecasts are getting revised downwards, with inflation being very benign. What we have seen is that despite having an elongated accommodative stance on monetary and fiscal policies, global growth is struggling. This will keep rates lower for longer with sufficient liquidity. Locally, we are likely to grow consistently, aided by resilient consumption and reviving investments amid a strong backdrop of structural reforms. On fiscal deficit, we have been largely within the targets; inflation is under tight control, led by lower food inflation. The Monetary Policy Committee (MPC) is unlikely to change its accommodative stance unless oil spirals up and inflation trajectory changes.

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Is the worst behind us regarding rupee and oil prices?

India has one of the highest real interest rates globally, and the benign global interest rate environment gives us an ample scope to cut rates. Surely, oil has to remain manageable, for having inflation expectations at the lower end. While we do expect rates to come down, one should also not lose focus on having durable liquidity for effective transmission to happen. Thus, we are bullish on interest rates and bond yields should head south, should the liquidity remain adequate. The rupee remains overvalued and there should be a slow gradual depreciation.

Your view on corporate earnings growth?

It is hazardous to try to predict earnings growth. However, with some reasonable confidence, I can say that earnings for FY20 will show considerable improvement. The banking and the finance sectors will lead earnings growth, which is a sizeable weight in benchmark indices. With interest rates staying benign, the effect of financial leverage would be positive on the broader market earnings.

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