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Investors need not cash in on gains just yet: Michael Kurtz

Interview with Chief Asia Equity Strategist, Nomura

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Talking of how fundamental changes have provided a fillip to the sagging global markets in the new year, Michael Kurtz, chief Asia equity strategist at Nomura, tells Puneet Wadhwa he expects foreign inflows into India to sustain. Edited excerpts:

Most markets across the globe, including India, have seen a good upside in 2012. Has there been a fundamental change or is it pure liquidity chasing the stocks? Is it an appropriate time to take some profits off the table?
Fundamental changes have unfolded on the global scene in the past three months, and for the better. By the end of 2011, Asian markets had over-discounted several tail-risk negatives, including a euro zone break-up and the resultant credit market disruptions, a Chinese hard landing due to a tight monetary policy, and a US double-dip recession that would have likely resulted from the above two challenges. 

None of these is as likely now, particularly with the and the People’s Bank of China (PBoC) having grown more accommodative and the US recovery beginning to look more bankable. 

But, investors needn’t necessarily cash in on their gains just yet. The fund volume that has returned to Asian markets is still, perhaps, a quarter of what might be expected to materialise, multi-month, if policymakers keep backing us away from the brink.

Given the developments in Greece, what do you make of the situation in the euro zone?

There’s no mistaking the fact that Greece remains in a very tight spot fiscally and that aggressive consolidation is needed beyond the latest round of measures. With its budgetary dynamics so fraught, there’s no assurance yet that Greece would avoid default. 

However, we are impressed with the resolve with which Greece’s European partners have addressed every flare-up so far. Greece represents a statistically minor component of the European GDP and total debt, and global markets have had enough time to prepare for the possibility of a Greek default. Thus, such a contingency may have far fewer repercussions today than what it would have had even five-six months ago.

Is the optimism regarding the US economic data justified or have the markets celebrated a little too early?  How do you see the US markets panning out in this backdrop and in the run-up to the presidential elections?
We do see reasons for optimism on the US. Underpinned by a weaker dollar and overseas sales, US corporate toplines have been growing in double-digits, quickly consuming the spare capacity, leading to  increased pressure for hiring and capital spending.

Meanwhile, the housing market is showing encouraging signs of stabilisation. The elections have been a useful spur to both parties to find at least some common ground on tax-based fiscal stimulus.

We don’t expect the US markets to outperform. However, a return of risk tolerance will encourage equity funds to flow back to emerging markets in the months ahead.

What is your investment strategy and outlook for the Indian equity markets?
We advised a ‘neutral’ weighting for India relative to the Asia-Pacific ex-Japan benchmark for the start of 2012, but this was as opposed to ‘underweight’, which was how we perceived most institutional investors to be positioned.

This was based on the prospect of the Wholesale Price Index (WPI) inflation moderating, leaving room for the Reserve Bank of India (RBI) to cut policy rates and support modest credit growth; the rupee’s year-to-date rebound also helps dampen inflation pressures.

In addition, we noticed that by the September quarter, Indian earnings were coming in line with consensus expectations — an improvement over the previous quarters of earnings disappointments.

With this, we have been advising investors to hold higher-beta, largely cyclical names in interest rate-sensitive sectors, such as banks and automobiles.

Do you expect the fund flow into India continuing at the same pace as in the first two months, given the revised GDP growth estimates, widening fiscal deficit, inflation and the rupee-dollar equation?
So far, cross-border fund flows into India have been impressive. And, while the persistence of such inflows would be helped by things, such as fiscal progress in the upcoming Budget, monetary policy that safeguards the rupee’s stability and pro-reform outcomes in India’s pending key state elections, it is also very much a function of global risk tolerance and policy at the major central banks.

The Sensex has gone from a fairly large discount of, perhaps, 12 per cent versus the long-term average PE back to roughly parity today, so the value proposition has been largely neutralised. But, with further central bank easing underway and risk-tolerance on the mend, we expect foreign inflows to persist for now.

How do you see the commodity space panning out in 2012?
China’s slowdown is mostly priced in at this point, while PBoC has been making an increasingly explicit shift towards the growth-supportive liquidity policy.

Meanwhile, the US demand recovery has gathered pace in recent weeks and Europe may be successfully ring-fencing the worst of its potential problems through creative monetary policy and political resolve.

A combination of bottoming/recovering demand and a more aggressive monetary easing suggests a greater upside for commodities and energy prices. Concerns over supply constraints due to political tensions only add to the existing upward pressure.

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