"Not much downside from here...at the most 10%"
SMART TALK
Jitendra Kumar Gupta / Mumbai December 29, 2008, 0:27 IST
Jim Walker, the founder and managing director of Hong Kong-based Asianomics, believes that the worst is not yet over and there could be bad news flowing with regards to industrial and GDP numbers. The corporate earnings could equally be in bad shape and surprise the markets. Meanwhile, he suggests that investors be cautious and selective while investing as the difficulties could last till the middle of financial year 2010.
Asianomics is an independent economic research company providing insights and analysis on policy making and macroeconomic trends across Asian economies principally for the fund management industry. Prior to establishing Asianomics in December 2007, Walker was the chief economist at CLSA Asia-Pacific Markets. In a conversation with Jitendra Kumar Gupta he shared his view on various issues pertaining to the Indian economy and the equity markets.
What is your assessment of the global scenario? Is the worst over?
I do not think the worst is over. We have just begun and the negative effects on economic activities are going to come through. Next year, I think we will have a global recession, which would include the recession in US, Europe and Japan. Also, various Asian economies, which are heavily dependent on external trade, like Korea, Taiwan, Malaysia and Singapore will see a decline in their GDP. Thus, for countries whose investments cycle is associated with the export markets, there is lot more news to come.
Do you think the worries with regard to the Indian economy are fully reflected in the equity markets?
Markets have adjusted a lot. I think, we would not really know until the end of first quarter or may be the beginning of the second quarter next year whether we have adjusted enough in terms of interpretation of the corporate earnings. There is not much down side from here, or at the most it could be in the range of 10 per cent.
Recent projections by the World Bank indicate a world GDP growth of 2.5 per cent in 2008 and 0.9 per cent in FY09. In this light, what is your view on the Indian economic growth?
We have already seen things like negative industrial production data, the export cycle is going to be effected and the industry in general will be affected. We are looking for Indian real GDP growth of 3-5 per cent in calendar year 2009. But, I think, the Indian equity markets have actually discounted most of it.
What would you say to those who started accumulating shares? Should one buy at these times?
I think people are too optimistic as if the worst is completely over. However, if they are buying selectively then that could be the right thing and they should not be wary of the markets. I personally would not be rushing just now. I will wait for some time or certainly another three months and at the end I would be looking to deploy my money into the markets. This is primarily during the corporate earnings slowdown. Things would be much clearer after the fourth quarter of FY09.
How long will the current scenario prevail? And what are the indicators that signal that the worst is over?
I think it could be another year to go before the large economic news is really factored in. The signals are suggesting that by mid-2010 the US economy will be on the recovery path. Others things to watch would be the yield curve, money supply growth and the housing market.
What is your view on the foreign money flowing into Indian equities again?
Many foreign investors are waiting to deploy and readjust their portfolios particularly the pension funds. However, it is difficult to forecast at the moment. In our assumption it is certainly going to be another 9-12 months before we see a meaningful foreign capital inflow. This will be primarily helped by the low global interest rates and may be the expectations of economic recovery in 2010.
What is your view on interest rates in India? How far they could soften and what is the time frame?
From here, I think the interest rates should moderate quickly. We are looking at a repo rate of 5 per cent and CRR to go to 4 per cent from the current levels. These are probably the aggressive cuts to be announced over the next six months. We also expect interest rates to fall by another 150 basis points as well.
What are your views on gold?
At the moment, gold could probably underperform over the next twelve months, purely because we expect there is more down side for the commodities. But after that, gold might again look more attractive as there would be more inflation.
What do you read into India’s falling IIP numbers? Where could they go from here?
We could be heading towards as much as between -1 per cent to -5 per cent for the next few months before they approach to positive levels again. As far as inflation is concerned, just now we do not need to worry about it. The economy is much more likely to be suffering from deflation. However, the central bank needs to keep an eye on inflation; they need to be aware that it could come back very quickly. What is your view on India’s corporate earnings?There is still going to more negative surprises on the corporate earnings front. There is increasing downside risk to the expected GDP growth and corporate earnings as well.
Are the measures taken by the Indian government good enough to withstand a probable slow down?
I think the Reserve Bank of India is making appropriate moves and they are reasonably good moves. But, we do not think these monetary measures can actually help in the short term.
What are the chances of Indian equity markets re-testing recent lows?
I personally do not think there is going to be any re-testing of recent lows in the Indian equity markets
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