Sensex to stay between 7K & 12K in 2009: Geosphere Cap
Published on Friday, December 26th, 2008 at 10:01 PMAuthor: admin (5507 Articles)
Arvind Sanger, Managing Director of Geosphere Capital is still cautious on the markets, even though downside may be limited. Currently, there is a bear market rally, he said, adding that he sees a “profit bust” coming now. Sanger said that he would not be surprised to see another bear market rally of 30-40%. He is concerned about where the global growth is going. Many challenges remain, he said. He sees the Sensex between 7000 and 12000 levels in 2009.
Commenting on India, Sanger said that the Indian markets may re-test the bottom. He has not seen all indicators for a bottom yet. The earnings bust will last for few quarters, he added. The market has not factored it, he said. Sanger does not see any meaningful earnings improvement over the next two-three quarters.
Sanger is not convinced by the rally. The bottom would come if there is complete apathy, he said. Sanger is looking for a U-shaped rally with clear signs of apathy for a bottom. The global contagion is turning negative and the challenges won’t be fixed easily, he said.
According to Sanger, a lot of bad news is out, but he is not sure if all “cockroaches” are out of closet. There is a lot of speculation and bad use of capital, he said. He sees many challenges for 2009.
Deflation is the key short-term worry, Sanger feels. The US bond market is pricing in a deflation, he added. Printing so much money can debase US currency and also stoke inflation, he said. Fighting deflation is a tricky problem, he said, adding that its consequences are not known.
Here is a verbatim transcript of the exclusive interview with Arvind Sanger on CNBC-TV18. Also watch the accompanying video.
Q: Last time you were here you sounded extremely circumspect. Are you a bit more optimistic or still very cautious?
A: I am still cautious. I don’t think that the big downside that we saw in the markets back then, I don’t think we have that much left. But I don’t get the sense that this is anything more than a bear market rally. I just don’t see how we have turned the corner on all of the growth challenges that are facing global markets and certainly the Indian markets.
So, I think the profit bust that is coming is still ahead of us. That is why I am still cautious overall of having any meaningful move up.
Q: As bear market rallies go, how much of it has played out? Is it just a typical December pop that we get sometimes of 15-20% or is it anything more meaningful than that you reckon?
A: I think bear market rallies can be even more powerful than what we have had so far. So, it wouldn’t surprise me if we got a rally, whether it is this one or another one where we got 30-40%. But I think that the fundamental question that remains is, where is global growth going? Where is the earnings outlook for companies globally going? If that is the challenge, and certainly Indian companies are not immune to the same challenges, then I think the rally may have problems at some point in the future. It is very hard from a trading standpoint to make these trading calls as to when the rally runs out of juice.
Q: As this pullback rally has played out over the last four weeks, we’ve heard many voices saying that at least the worst of the price damage is behind us. We have a bottom in place. Now it is a matter of time and the market might consolidate. Can you say that with conviction?
A: If the question is, have we seen the definitive bottom in the market then I don’t think you can say that with conviction. One of the things that nags me in this sell-off and then this rally is, subsequent to that sell-off is this watch that everybody is having of calling the bottom, and to the extent that we see this as a much more major ending of a multi-decade bull market, then I think the bottom comes when people have basically given up and don’t even care if it is a bottom anymore. That is the sentiment measure one has to use, and I don’t think we are there yet.
Q: That complete apathy, you haven’t seen yet?
A: No, I don’t think we’ve seen it. We may not get it; I may be surprising that this may be a more regular bear market where we come back with somewhat of a V-shaped rally. But my concern is more of a U-shaped cycle where there is apathy for a while and I don’t think we’ve seen that.
Q: So, you are saying after such a big bull market ending, it would be surprising if we just got away with one year of pain, however intense that pain might have been?
A: Yes, I think so. I think the global growth challenges are so sychronisingly bad and the global contagion of lack of confidence, everything, all the things that were going well on the way up on a global positive contagion are now going the other way, whether it is global liquidity or it is global risk appetite or global consumer or business confidence. All of these challenges I don’t think are going to be fixed that quickly.
Q: That is another refrain that we have heard in the last few days that most of the global bad news is out in the open right now. What can surprise after this? So, maybe the market is discounting a lot of the bad news, which will be announced over the next 2-4 quarters. Do you agree with that or could there be surprises on the global bad news front?
A: I think a lot of the bad news is out. That I don’t disagree with at all, a lot of the bad news in terms of slowdown in a lot of different market segments, business segments is out there.
But I think one of the things that concern me particularly in the emerging markets and certainly India is an example is, have all the cockroaches come out of the cupboard, as I call it, in terms of minority shareholder rights. We have seen things happen where we’ve found overleveraged oligarchs in Russia where minority shareholders have been disadvantaged and the government is moving to the rescue of the oligarchs where they’ve had their assets taken away. We’ve seen similar things happen in Indonesia, and I guess we had the example last week, which seems to have got reversed for now.
But my concern is that there is a lot of speculation in other misuse of capital that was done. All of the bad news in some of those items have yet to come out. So, I don’t think it is only about growth, it is also about other aspects of capital markets that could be challenged in 2009.
Q: Of course part of this rally that we have seen has been predicated on the kind of stimulus packages that all governments are working on. It almost seems like, whatever the problem is; the governments will throw something at it. Do you think that can end up fixing the problem? In that, is this bear market different?
A: Yes. It can do some stuff to limit the damage. But I think there is a risk here that you have something going on, which is fairly unforeseen. It is very hard to forecast where it goes, which is that the US is right now in the process of printing money so to speak and literally figuratively because the Fed has basically decided to expand the balance sheet and use it to buy all kinds of assets without it showing a company debt.
So, what you are trying to do in essence is to create the conviction amongst individuals that rather than saving if your money is going to be worth less tomorrow then today you might as well go spend it.
So, if they are trying to re-stimulate inflation, there is a strong possibility that at some point they will succeed. The problem is if they succeed in re-stimulating inflation in the middle of an economic slowdown that won’t have taken off, you could end up with the worst of all world’s in the next 6-12 months, which is you get to see a brief recovery of growth and then you see the inflation genie out of the bottle and a much lower growth.
So, can you imagine what India would be like if you had a growth rate maybe recovered to 7%, which I think would be the best one can hope for in the next 12 months, and oil is back above USD 100 per barrel, and we are again trying to fight the inflation battle.
So, I think the challenge in terms of government stimulus is that if they succeed they might succeed in ways that might be a little different than what people are assuming. So, I think there are challenges in that too.
Q: Which of these is a likely scenario given the kind of liquidity that is being generated in the world today that it will eventually lead to a rise in asset prices once again – commodities, equities, everything – or do you think the danger is a deflationary kind of situation despite the fact so much liquidity will actually play out?
A: In the short-term I think deflation remains a challenge. One of the best measures of smelling out inflation in history has been the US bond market. It is usually very good at smelling inflation. It seems to be in a complete deflation concerned mode.
So, it clearly is telling us that there is no inflation around the corner. The commodity markets like oil are telling you there is no inflation around the corner. The only market that seems to be believing in inflation – in the rally that we had in some of the commodity and energy types of stocks in the last two-three week rally were in the equity markets.
Q: You would favour the bond and the commodity markets as more astute readers of this?
A: I would think so.
Q: So you think that we could land up in a deflationary kind of situation next year?
A: We are certainly looking at inflation. We already are kind of in a deflationary environment. We are looking at a deflationary environment at least for the next couple of quarters.
But I am really starting to get concerned that we may fix – if you basically take the Zimbabwe approach of printing money as an extreme example and of the US Fed as the global reserve currency, the US dollar can get away with it and print money, at some point you can re-stimulate inflation. My concern is, if they are successful – be careful what you wish for because it kind of debases certainly the US dollar but it destabilises global currencies, and if it creates inflation it might be the kind of inflation that might come with somewhat more anaemic growth because you’ve not really fixed the underlying structural problem in the global economy if you are able to re-stimulate it by asset purchases, because the government spending, which is one of the questions asked is relatively minor in proportion to the spending slowdown that is happening from either real estate or private sector on a global basis, or from consumers.
So, you are trying to offset some of that but at the same time create the fear of inflation, or take away the deflationary spiral to re-stimulate demand growth and I think there is a risk that it has not been tried before to fight deflation as aggressively as is being fought right now. The consequences of that are somewhat unknown and unknowable at this point. But I think there are certainly a lot of risks in that.
Q: You track commodities very closely, what’s the forecast for crude now after its complete collapse?
A: I would say we were cautious on crude once global growth started to slowdown because that was the number one element. The reality of crude is that the difference between USD 150/bbl oil and sub USD 40/bbl oil has been a correction of global demand by about 2-2.5%. So it is a pretty small edge on which rests the difference between a mega bull market and mega bear market. The bad news is largely behind us. I would say that sub USD 40/bbl I am a buyer of crude oil today with a one to two-year view because crude is going to be at least back above USD 50/bbl in the next 12-months and I would be not at all surprised if it is USD 75-100/bbl in two-years time.
Q: Do you think we have a bottom in place here on crude?
A: It is very hard to call exact bottoms but I think we have all the elements in place for getting close. We are starting to see some demand recovery because of low price re-stimulating demand. We are obviously seeing some production cut backs by OPEC but more importantly, we are reaching marginal cost of production for some of the higher cost producers who are going to have to curtail production. We are going to see significant production in capital spending in certain projects in many parts of the world and therefore all of those are setting the stage for both the supply and the demand response which basically helps market to bottom and again the supply response will play out over 12-months. The reaction to that in the commodity markets will happen much quicker.
Q: Gold has been far more resilient than crude in the fall – can you think of gold and four-digits in 2009?
A: It is very likely. I just think that given as I said earlier what the Fed is doing and what other countries are doing all of which are running up big deficits and basically in some cases, but certainly US being the most agree egregious example in a currency debasement mode in terms of doing whatever it takes to re-stimulate economies in terms of borrowing money or printing money. At some point there is a very strong possibility that gold could have a major rally beyond just going to USD 1,000/oz in terms of the fact that the investors are having that view of a better place where they trust their money then investing in US Treasuries which seems to be right now the instrument of choice for risk averse investors who are willing to take ridiculously low rates right now. Interest rates on 10-20 year US bonds are 2-2.5% which is amazingly low. But at some point we could see that move into gold as an asset class.
Q: What’s your call on India now? Do you think we have a bottom in place for the Nifty at 2,200-2,500 or you don’t think so?
A: It is very hard to say that for sure. My sense is that we will retest the bottom. My sense is that there is too much of a hope that we may have seen the bottom. I haven’t seen some of the indicators that are likely to see for a bottom to be formed. We haven’t seen retail money coming out of domestic mutual funds in a meaningful fashion. We have not seen some other metrics that would suggest to us that we have seen a bottom. The earnings bust is going to last for a few quarters. I am not sure that the market historically has bottomed that far in advance of a bottom in earnings. So therefore that’s what makes me cautious as to whether we are looking out too far into the future because we are at least 2-3 quarters away from any meaningful improvement in the earnings outlook before the negative revisions are done and we start to get some positive revisions in the earnings.
Q: Do you think we could see some kind of a mend starting in Indian equities at any point in 2009 or it could just be tossing around and what would be year two or phase-two of the bear market?
A: Second half of 2009 could be okay. Again next six-months I am cautious but eventually like everything else this too shall end and whether that is in second half of 2009 or 2010 I don’t know. One of the things that I am still somewhat disappointed in is that Indian corporates and businesses don’t seem to be at least publicly for the most parts get enough. One of the reasons of that we are having a hard time getting bullish is we are not seeing enough fear and action following that fear amongst Indian companies to baton down the hatches because the one lesson of the last one or two-years which I don’t think many investors have commented on is that Indian corporates dealt with prosperity very poorly. I think Indian corporate have a history of dealing with tough times much better and I would like to see them switch from that prosperity mindset to that tough times mindset much faster than they have and they have been still caught in this la-la land of which I think was dream world. This 9% GDP growth was a function of easy money from overseas – that’s not coming back for the next five-years. So the sooner corporate India and the rest of the India gets arms around the fact that that 9% growth was a dream that was made possible by easy money from overseas and to the extent easy money from overseas has gone for a long time – it is not going to get back there and it is going to take a lot of hard work to get to some reasonable level of growth.
Q: Which pockets in India are you most circumspect or bearish about – sectors, stocks whatever you want?
A: Clearly real estate is a sector. There are challenges. There might be value there, but how you get from here to the end point is hard to see because it is going to take some price reductions, in some cases debt rescheduling a lot of other things. So, it is now a small sector in terms of market cap, so it is not that big a deal.
I would say that the IT services sector obviously has challenges in terms of their customers particularly in the financial services industry. But I would say that the sector that worries me the most is the one that is dependent on the capex cycle – engineering and construction companies, because the capex cycle bust – again the stocks have gone down a fair bit. I think the capex bust is going to be longer prolonged than people think because they seem to think that if the financing comes back then spending will come back. But I think Indian corporates when they get down to the battening down the hatches more than not are going to be rushing out to spend money on capital projects for a while. Therefore delays, postponements, cancellations of projects have only begun to scratch the surface and as those take hold in a more full fashion, the capex cycle and anybody dependent on that is going to be facing the biggest headwinds in 2009.
Q: A mug’s game, but if I put a gun to your head and asked you to map some kind of a range for 2009, what are the highs and lows you could possibly predict for the index?
A: If I am assuming the Sensex as my metric, I would say 7,000 to 12,000.
Q: Range for 2009, no more than 12,000?
A: Well I guess we could get above that. Maybe I am being too cautious because in a bear market rally you could get much more than that. But a sustainable move much higher would require things to get much better on a fundamental basis. And I am still not seeing that.
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