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Global markets have reacted sharply to the rise in US bond yields. MARK MATTHEWS, head of research for Asia, Julius Baer Group tells Puneet Wadhwa that right now it is premature to say global markets are entering into a bear phase. Though he remains bullish on India, he advises staying away from the mid-and small-caps. Edited excerpts:
Is the market reaction to rising bond yields overdone?
Central banks have been taking the liquidity away, starting with the US Federal Reserve (US Fed). That's one reason that the bond yields have started rising. The other reason is that the global economy is growing at a healthy rate. The macro data has been above expectation. The big mystery, however, is that the bond yields are rising now; the big mystery is why they weren't rising earlier.ALSO READ: MF investors may not be able to support markets fall if selling intensifies
The US Fed has raised rates five time since 2015. The bond markets are now getting to a level where they should have been at a few months ago. The bond market is not being irrational, but is pricing in very strong economic growth. Most asset prices correct if interest rates go up, but stocks don't always do so. We expect three more hikes by the US Fed this year, but even then the interest rates will be below the long-term average.
The S&P rallied 5.6% in January 2018. Most strategist were expecting around 6% rally in the index in the full year. We cannot have such rallies without a pullback. It was a technically an overbought market, which was due for some correction. We can still fall 10% form here and still be in a big bull market. Looking at the incoming data, we don't see recession setting in globally at least for the next 12 months. It is premature to say we'll have a bear market right now, given the world's fundamentals.ALSO READ: Correction was overdue; India more vulnerable than global peers: Jim Rogers
How does India now look as an investment destination as compared to emerging market (EM) peers?
There are pros and cons to investing in India now. The pro is that India is a very strong domestic factors-led economy.
It looks like the earnings have bottomed out. We think earnings in this fiscal year will be in low double digits of around 12 - 13% and around 20% in financial year 2018-19 (FY19). The bad news, however, is that the Indian market tends to react quite strongly to what happens overseas. The silver lining there is that the recent buying has not been done by foreigners, but by local institutions and mutual funds. Putting this all together, the Indian story still looks good. While foreign investors may not choose to invest here, the domestic money will continue to flow in.
What is your return expectation from the Indian markets over the next 12 months?
The internal factors are largely favourable, and what will move share prices is the earnings growth, which looks positive. The budget, too, was good. Though trying to be populist, it managed to stay on course. The government is not going overboard in spending money. This shows that it is getting ready for the general elections in 2019. They are also not allowing the fiscal deficit to blow out of control.ALSO READ: Why markets are plunging? Blame poor corporate earnings, high bond yields
Typically, EMs fall more than the developed markets in case of a correction. Since foreigners have been big sells in the Indian market in 2017, they are not too much overweight India right now as well. As a result, they won't have much to sell in India in case of a market fall. The downside for the Indian markets will be limited in case of a global correction, say less than 10%.
Which sectors in the Indian context are you bullish on?
We like public sector banks (PSBs), agriculture sector which has been one of the government's top priorities in the recent budget. Mid-and small-caps appear expensive and did merit a correction given that they have been the focus area of retail investors. I will not buy into these two segments.
What is your view on the way long term capital gains tax (LTCG) has been imposed - on the amount of gain and not the tenure?
The LTCG proposal will grandfather everything till January 31, 2018. Though the markets did not take the proposal well, they should not have been surprised because the government had been meeting stakeholders before announcing such a measure. Most knew that LTCG was coming. Post budget, we all know what the tax percentage will be, and I don't think it is a big deal.