After 2015, renewed fears of China’s economic slowdown continue to rattle global markets. Even India was not spared. Speaking to Bloomberg TV India, Dalton Capital Advisors Managing Director UR Bhat gives a perspective of what the markets can expect in 2016.
China continues to rock global markets. Was this expected or did it shake you up a little bit, as we were supposed to start on a better note?
There is no supposition like that. Basically, the problems in China are a bit more serious than generally written about. There is a huge structural problem, which needs to be addressed. They are trying to address it by strong arm methods — arresting people and halting sales. That is one of the reasons it is coming back to haunt them. Six months ago they put a restriction on people who hold more than a 5 per cent stake in a company. That is coming to end this Friday. I think people are second-guessing that okay, there will be big sale after Friday and so front run this. Then of course you have the Middle-East countries again on the boil. The dismal PMI data are just excuses. But there are larger problems.
I think China is too big to ignore. So I think it cannot be a much localised problem if China cannot address its problems in a great hurry. I think it will spread and global markets will be affected, like what we saw on Monday because if it had been only China, it wouldn’t have affected global markets so badly.
How will fund flows into emerging markets (EMs) fare given that the US Fed has started raising rates and China continues to slow down?
However much we say that India is different but we get categorised along EMs. Most of the EMs are commodity exporters, and so we are in trouble and China, being the biggest one of them, is in serious trouble. So India will also be seeing trouble as a result of what is happening in other EMs. That said there is another school of thought that India is a bit different because it is a net commodity importer and things are in much better shape than other EMs. India might actually be a star among EMs.
But since capital flows in EMs may be weaker, India will also get affected.
Do you expect the market to correct, say about 4-5 per cent…and then it will be an opportune time to buy?
From a long-term perspective you should get into some stocks at this moment when there is huge correction.
As far as China is concerned, we don’t know. You cannot sell if you hold 5 per cent in a company and put circuit filters. The only thing that is left is asking their institution to start buying. It is also on the anvil and that’s why the markets are up on Tuesday. The Chinese problem is structural and it will take time. But in the meantime, if you are a long-term investor, these events give opportunities to bet on stocks which they like otherwise.
We have certain events coming up in India — earnings season and the Budget. How much emphasis are you placing on these events?
The economic turnaround will happen sooner than later — may be in the second half of 2016. Third-quarter earnings this month are not going to give a great fillip to the market. The Chennai floods may have some impact on the earnings of some of the sectors.
But the Budget could give some fillip to the market, especially long-term investments. That said, the market is waiting for the economic recovery and consequent to that an earnings recovery. Till that, I don’t see any big turnaround in the market.
Do you expect the benefits of lower oil prices playing out this year also?
Most big brokerages are saying that oil prices are headed down. That could be good for India. It gives them enough fiscal space to do what they want in terms of kicking the investment momentum as private investment is not really taking off. All these will take some time to see an economic recovery on the ground and most people are pencilling in the second half of 2016 for that to happen.
Is it time to go for a portfolio churn towards defensive?
I think that’s the way to go because the sort of imponderables coming from China and probably not too strong inflows coming from FIIs into India, it is worthwhile to be defensive.
Which sectors are you looking at?
The auto sector probably is doing well and I don’t see much exits by FIIs. Even in pharma, which has seen a huge correction owing to FDA woes, I expect incremental positives. Even private sector banks continue to shine in the financial space.