Markets likely to recover before the economy: Tushar Pradhan

Markets tend to price the real world a lot earlier and that is why they are called the leading indicators. Do not look for the economic numbers to say that the market will move from here on. The market will move first, says Tushar Pradhan, CIO, HSBC Global AM India. Excerpts from an interview with ETNOW. Are we in for a long winter or is this the darkest hour before the dawn? Is there a scope for revival?Markets are going to remain volatile and they will be driven by news -- both internal and external. It will take a lot more time to understand where the market is likely to go because the cycles are slower and take a lot of time before they recover. We are already in a slowdown of eight to nine months. So, is it going to be more gradual? Sometimes developments in the economy are a lot faster and they discount the stories much quicker. So in a sense, one would not try to feel that the market will take a long time to recover. The market recovery depends on two or three things. One is sustained earnings growth and some sort of stimulus is expected. If it materialises in some way, that is enough for the market to take strength on that basis. The fundamentals in terms of the cost of capital, i.e., the interest rates, are down. Liquidity is fairly comfortable. Globally, flows also are fairly robust because of the rate of yields elsewhere in the world. The entire investment community is looking for yields across the world. There is interest in yielding assets -- be it Indian assets or emerging markets. The ground work clearly is positive. I do not believe the market will remain low for long though the economic recovery can take a little longer. Are you saying that markets will recover before the economy and that right now, fundamentals are ahead and valuations are lower?Clearly so because we have seen that the markets tend to price the real world a lot earlier and that is why they are called the leading indicators. In a sense, do not look for the economic numbers to say that the market will move from here on. The market will move first and then you try to see the kind of impact by looking at the economic numbers to say that was coming and this is what the market sensed. How far the market looks is a matter of academic debate. It could be six months or three months. Could it be looking one year forward? One does not know that but clearly the markets will give a signal that the economy is reviving by its movement before the economy revives and you think the market will move up from there. You mentioned stimulus. Whatever have been announced so far, may have had some impact but perhaps not the kind of runaway impact that we were hoping for. as you also just mentioned it will take a little bit more than that. What kind of stimulus do you feel could really have more substantial impact and get things going in a more meaningful way?What one has to see is that the impact will be felt most where the stimulus is supposed to act on the biggest problem that we face today. The biggest problem that we face today is clearly in terms of non-performing assets and to a certain degree, even in the housing finance area where the NBFCs are in some trouble over funds that they need on a continuous basis. If there is something to deal with that -- whether speeding up of the processes or freeing up this capital which is suck for so long -- that will have a very dramatic impact. However, having said that, I am not saying that that is an easy one to take. There are many complicated issues there and it is not an easy one to address. But the point is that the stimulus cannot be broad in nature. It cannot be sentiment or an intent statement. The stimulus has to be real. It has to be felt as an impact to the most critical elements that we are facing right now in terms of slowdown. If the stimulus does address these issues, then the markets will take heed of that. But if the stimulus is in the way of a statement, an intent, pretty broad in nature, that is not likely to move the market, at least now. It is very difficult to say what kind of stimulus can be expected but it has to be something that hits home quickly and where you can tangibly see a movement in terms of things going from bad to good and a pathway which is visible. If something like that comes through, then the market is clearly going to take to wing after that. A lot of people believe that there is a bigger merit in looking at some of the small and midcap stocks because whenever the market tide turns, that is where you will generate high alpha. Do you believe in the same and if so, where would you hunt within the mid and smallcaps?The mid and smallcap space is very large -- by number of companies as well as the various segments of the economy that these companies operate in. It is very difficult to focus on any one or two. But coming back to your first question, in terms of where the valuations are, clearly the valuations are much more attractive here. But smallcaps, especially the ones which are much smaller than the average in the smallcap range, do not move in spikes. It takes time for them to develop a lot of momentum before they start moving very quickly. I would think that one should be aware of the fact that these movements become very dramatic in a very short period of time but they are actually preceded by a very long period of very low activity and valuations. Just because they are cheap now, I do not think they are going to bounce back. They will remain cheap and the story on earnings will need to continue to keep coming. At some point of time, the critical period arrives when suddenly valuations take off. If you see the movement in the small and midcaps over last 20-25 years, you will find that this is the case. I do not think now there is going to be any difference from what we saw in the past. If midcaps and smallcaps have had a tough time for two years, that does not mean that they will bounce back again just because of earnings turnaround. It will take some time but I will still be in the camp that recommends a buy now because you never know when the actual best valuation or the bottom is reached. So, it is a good space to be in across the spectrum though not any particular choice at this time. But one has to be patient here as well and sometimes maybe the narrower market, the larger caps actually move first and that may be the place to be in if you want to see a quick bounce back. But the small and midcaps will be definitely very profitable in the intermediate term to long term. What is the ideal scenario in this market? What is the pitch telling you -- play on back foot or front foot?That is a very interesting question. I think the wicket is a little tricky, which means that it is a little two-paced wicket, sometimes the ball keeps low and you are likely to get clean bowled and sometimes it actually does come at a very even pace, so that you can actually hit it back again. What I mean by that is sometimes the international situation is something that we are not really very aware of and it can give us one of those really strange deliveries. But the domestic situation is a lot easier to understand. The cyclicality of the slowdown is very evident. We do get these phases of low growth every three or four years and that is what we are undergoing right now. The inherent domestic nature of the Indian economy will ensure that no matter what happens to the world the consumption function is going to remain pretty strong. We do believe that even at 6% GDP growth rate for an economy of this size is reasonable to expect that the earnings cycle will continue in some period of time. So when it comes to the domestic scene, I would think there is a lot more visibility in terms of how that will turn. When it comes to international situations of course, we really have a very low rate of understanding in terms of how and what will happen but they do have an impact on our markets and that is really when I call this wicket two-paced that if we do get a good international backdrop, then the Indian economy has a much better chance of turning around. A turnaround in itself domestically will not mean much unless the world comes along with it. So in that sense not a very easy answer.There is a bit of uncertainty globally and there is slowdown locally. Currently faced with these two things, one needs to be patient, focus on what is really visible and go with it. I would think that bat on the front foot, but be a little defensive. Before you come out with your strokes, a couple of defensive shots are called for.

from Economic Times https://ift.tt/2HQLHux