Not a V-shaped recovery, but things to improve in next 6 months: Mark Matthews, Julius Baer

Not just in India but in Europe and the United States also, there is a consensus expectation that growth will rebound in the coming quarter, says Mark Matthews, MD, Julius Baer. Excerpts from an interview with ETNOW.

How positively is India positioned currently in the overall global environment, given the resumption of funds flows?
The major thing that has happened over the last two weeks is there is a growing sense that the global economy will be picking up and the reason is the fact that the leading indicators have turned positive in many places in the world. For example, the Philadelphia Semiconductor Index typically leads the US Purchasing Managers Index and that has risen very sharply.

But there is a whole bunch of other ones too and PMIs generally seem to be troughing and rising. It is a function of all the central banks that have cut interest rates this year. The Federal Reserve has cut interest rates, but there are 25 other central banks that cut interest rates this year as well and ECB has started quantitative easing in September while the Federal Reserve has started quantitative easing in October, in all but name only.

There is a sense that the global growth proxies are the place to be and I am not sure if that includes India. India’s economy is seen as largely a domestic one and that is for good reason. The exports are something like 18% of GDP. People have been looking at places that are more highly correlated with global growth in India.


We have had all the right moves in terms of policy making by the government. We are also looking at the divestment agenda for something to really kickstart revival. What is your view on this?
We probably saw a bottom for the economy in the most recent GDP printed 5% and I imagine that by the end of the year, we will get back up to around 6%. It is not going back up to 8% like it was a few years ago, but I do think that it takes time for things like interest rate cuts and tax cuts to flow through into the economy. I do think that they will and so I am not seeing a V-shaped recovery, but I do see a recovery. I think things will be progressively better over the next six months.

Do you think a series of further measures would be required to ensure the growth kicks in and the markets remain happy?
To me it is actually a bit of a mystery why the private side is so weak. It is often blamed on demonetisation and the GST, but those are getting to be quite far in the rear view mirror already. I struggle to answer your question simply because I myself I am a bit flummoxed by the very weak private sector investment and weak consumption. If I do not know why it has happened, I cannot give any strong guidance on how it can be improved. I struggle to answer that question, I apologise.

Do you see growth coming back first then and in an ideal scenario and given what we do know, how buoyant do you feel? Would growth resume in the really troubled sectors like real estate or in the banking and financial front or across the board?
There are opportunities for growth in the private banks simply because the NBFCs are saddled with a lot of problems now and they are not going to give any new loans. I don’t think the big public sector banks have enough capital to give out a lot of loans either. They are being given just enough to keep floating to remain stable. There is an opportunity for the private sector banks to grab market share and it is quite encouraging that we can see the individuals lining up to recapitalise some of these private sector banks like YES Bank for example. That would be a space I would focus on.

Increasingly there is this debate on whether one should chase quality or chase growth? Quality stocks come in at a very, very expensive valuations. Do you believe that the time has come to move out of these expensive 10 stocks and look at the other end of the market too?
It is hard to answer. Again I apologise, but I would say that quality is almost always expensive. The only times you will not find it being expensive is in crisis and recessions and we are clearly not in one of those now.

So, in any of the very rare chances which come around once in every 10 years, you can grab a top quality stock at a low price. Otherwise, you pay for what you get. They are expensive because they are well run, because they have a history of treating minorities with respect; because you can be assured every year there will be perhaps not the strongest growth, but good solid growth so that kind of portfolio I think should always form the basis of the core of people’s holdings in equities.

Growth has been on a huge tear globally and I would see that as largely a function of low interest rates. The lower the interest rates, more capital is there just flowing around the world that is seeking out returns and willing to finance riskier things which growth companies usually are. A lot of people thought that the debacle with WeWork and the poor IPOs and big companies, ride-hailing apps like Uber and Lyft will somehow portending the end of growth because they fared very badly. But I do not think so. We are still in an environment with very low interest rates and therefore to answer your question, holding a bit of both is the way to go because quality is safe and steady probably should be the bedrock of one’s portfolios. But supplementing it with growth in this kind of an environment where interest rates are going to stay long for the foreseeable future is not a bad thing to do.

Now that we are pretty much done with Q2 what is the expectation of the earnings growth in the coming quarters in light of the economic scenario that you have painted? Following corporate tax rate cuts, are you seeing a significant improvement in earnings?
Around the world, this will be a major test for the markets. Not just in India but in Europe and the United States also, there is a consensus expectation that growth will rebound in the coming quarter. Let us see if it does. That is a bottom up analysis on the part of the analysts. The top down is specifically with India it is harder to see these bottom up forecasts being met. The top down would indicate EPS growth this year in India of around 5% to 8%, whereas the bottom up is still showing. In other words, the aggregate of all analysts expect around 12% to 15%. I imagine it will be probably closer to those mid single digit numbers.

Do you believe that the weakness in the housing finance sector will persist?
These kind of things take a long time. You can almost call what has happened in the sector crisis or at least a mini crisis. Typically when you get a big decline in price, it has to build a base, it has to go sideways for a while and I think there is still a lot of scepticism towards this base too. I see at least three to six months of building a base before you can move higher.

Any sector or pocket one should clearly stay away from currently?
Well the only thing I would say is that a global recovery is impending and we are going to see signs of that within the next three months. The resolution of trade war between China and the US is nearing. The one thing that does not benefit in this kind of environment is gold and there is a record amount of money that has gone into gold in the last six months. I figured gold probably needs to cool off here and come down a bit. I would see more price down side here.