Defensive & growth stocks to do well: Mark Matthews | Economic Times

By the Fed meeting in September, there will probably be about 40% less Covid cases in the US than today and then they will have an excuse to go ahead and announce the specifics and the timing of tapering, says Mark Matthews, MD, Julius Baer. The Jackson Hole Symposium is this evening. It is not the traditional two-day event but a one-day event and online this time around. What is your expectation? While it seems that on one hand, that taper tantrum could well be in the price, but the one-month returns after the Fed taper announcement back in 2013, India benchmark Nifty fell 7.5% and there was the price action on the rupee as well. Gold was down, crude was down. Copper, silver all posted losses. How do things look this time around?The market is not expecting a tapering now and usually what takes the market down is things that it is not expecting. But I do not think that is going to happen this time. The speech that Jerome Powell will give at 10 AM New York time on Friday will be just a reiteration of what they have said so far, which is that taper is coming but he would not give specifics. The specifics I think will come on the FOMC meeting on September 22. There are a few reasons for that. One is he is going to be reappointed around the Labour Day weekend which is September 6. So why would he want to upset the apple cart just before he is going to get reappointed by making some announcements about tapering at Jackson Hole? But I do not think it is coming because three Fed officials said as much yesterday. James Bullard is hawkish and so I would not read too much into him but Esther George put in her two words and then Robert Kaplan last Friday said he was thinking about not doing tapering. He said his business contacts were telling him things were good enough to go ahead and do it. The daily case counts for Covid are still rising in America. In India, when the terrible wave happened in March and April, it was Maharashtra that went up first and peaked first and rolled over first. In the southern states of Louisiana, Arkansas, Mississippi, Texas, Covid cases are dropping very sharply. So, first in, first out. By the Fed meeting in September, there will probably be about 40% less Covid cases than today and then they will have an excuse to go ahead and announce the specifics and the timing. We know it is a question of when. How do you position yourself whether it is right now the Jackson Hole Symposium or later in September? Well we do not think there is going to be a taper tantrum and I suppose there are two reasons I can think of off the top of my head and the one is that if you look at the government bond actions in America, in Europe and around the world, there is still tremendous amount of demand for so called safe investments and so that demand will naturally keep interest rates low. The second thing I would say is the US government is highly indebted and it is going to become more indebted to finance Joe Biden’s infrastructure stimulus plans. So it is not in the interest of the government to see rates go up and therefore unless there is a very compelling reason to make them go up like inflation, which I do not think will be persistent, the rates will stay low. In this kind of environment, one can be positioned in the defensive and growth stocks because historically those are the ones that do well in a low interest rate environment and I might also add that we think we are in a mid cycle slowdown where the Purchasing Managers’ Indices are peaking and rolling over and so in a few months, we will see GDP growth peaking and rolling over. In such an environment, defensive and growth stocks typically outperform. You mentioned that interest rates are not going to go up in a hurry because the US is one of the most indebted economies out there, but at the same time a gradual tapering may come through. How have you positioned yourself on the dollar index because further liquidity, we will see a dollar spike?I think it is going to weaken because of what you just said and also because Europe is growing faster than the US right now and they did not have a big Covid wave. The Euro is two-thirds of the dollar index and I would expect the Euro to do better than the dollar over at least the next three months. So we would look for the dollar to be weaker but also because globally, we will see a continued improvement in risk appetite. Typically when risk appetite improves, people go to other countries outside of the US and that makes the dollar go down. But right now, in India, we have been seeing outflows by FIIs. FIIs have been consistent net sellers. What explains that? Is it a pre-emptive action by FIIs when they slowly start to pull out from India and some of the other EMs as well?I do not have a good answer because I certainly would not sell India. My only guess is that it could be related to China in that a lot of people would have owned China by having exposure to emerging market ETFs and funds and they may feel they do not like what they hear over there, they sell that ETF or managed fund and obviously the price goes down. This is the only thing I can think of that would explain it. Has the time come to tactically align your portfolio? Given how strong the rally in metals has been, would you say as such the trade is intact or would you advise easing in metal stocks?The broad commodity complex is putting in a top and that is because there is an old saying in the commodities market that the cure for high prices is higher prices. Prices just got so high that they became unaffordable for many buyers and so we have seen that in several commodities including copper. The other thing is that the headlines on China have been related to their regulatory moves against their consumer technology companies but something else very big is also happening. They are really trying to take the steam out of their property sector. In a way I do not think they have done this before. They have never really dared to be too tough on property because it is about a quarter of their GDP but this time they are really serious because it is part of this whole move in China to try to equalise wealth. The people at the top clearly believe this is their number one priority and property prices in their view are a major exacerbating factor behind the inequality in the society and they want to bring property prices down. Purely on that basis, I would imagine there will be less demand for the things that go into property like steel and copper from China and it is the largest buyer of iron ore and the largest buyer of copper in the world. Longer term, obviously with copper, there is a special thing which is electric vehicles but that is probably a 10-year story and not a three month story. What you said about Chinese property markets is not true for India because the demand or for that matter even prices in select pockets seem to be holding up pretty well. How should the Indian real estate market be looked at? Does it make for a good investment? I am very positive on Indian property because the interest rates are low and property prices have been coming down for the better part of the last decade. They are affordable to many people and there is a lot of demand. A lot of people are seeing their wealth grow in various segments of the economy but the new economy in India is developing rapidly. The economy is digitising as a whole and the demographics are favourable in terms of young country, young population. Yes, I like real estate in India. In fact we were just making that case with the kind of hiring as well we are seeing in a sector like technology with the perks that are being offered, it does make a case that with increase in employment numbers, realty would stand to benefit. What about gold? Should the individuals holding gold ETFs reduce their positions?Gold did so well last year because of Covid and it has given back enough. I would not be a seller of gold. It is a nice thing to have in somebody’s portfolio as it has held its own against inflation over the years. Would I go out and buy today? There is not a particular need but I have always said that if you do not have it, get a little bit in your portfolio somewhere between 5% to 7%. But today, tomorrow, there is no urgent need to either buy or sell it. I see it going sideways but it seems to have actually perked up a little over the last few weeks. In the event that we do have a third wave, do you think the markets are more experienced in knowing how to deal with the resurgence because we have seen it happen twice? What usually has been the playbook? How would it work there?It would not be the same as previous times because the vaccinations are changing the game and the evidence is there that the vaccines work. I just saw the CDC published report one day. They did a study in Los Angeles County, during the month of July and it just found that if you are vaccinated, your chances of getting ill is one-tenth of what they were before and there is much less chance of being in the hospital. So in countries that are highly vaccinated or where the rates of vaccination are rising quickly, it is becoming something like a bad flu. You could get quite sick but usually not sick enough to go to hospital. The market can actually live with that and chances are, if you are vaccinated, you would not get sick at all but occasionally that happens and so the countries which are lagging on vaccinations are going to have to stay lockdown for longer. Initially the markets collapsed when we realised this is a global pandemic but very quickly they put in a bottom and unless a new variant emerges that really changes the game and there are more breakthrough cases in vaccinated people and much bigger increase in fatality, the market will be willing to look through another wave this time. What are you making of the IT opportunity in India? Should we be looking at valuation as a parameter?The first thing I would say is that these companies have benefited from Covid. The digitalisation of the economy that was happening anyway has been accelerated and when Covid goes away, that will not stop. Obviously we will go back to more meetings in person and that sort of thing but the building blocks have been put in place and the earnings growth has been very strong. If you look at Facebook or Google or Apple or Microsoft, they are trading at between 20 to 30 times forward price earnings and they have returns on equities of anywhere from 20 to 30%. How can you not like that? They are not expensive. It is not for such companies that are involved in digitisation not just of the American economy but the world economy excluding China. China set up its own companies to do these things. Going forward, in India and other countries, the governments that they have already made so much money in our countries that from now on, we want you to share some of the business with the locals. We have seen the beginning of that with Reliance. But going forward, there will be a lot more Indian companies benefiting from the digitalisation of India and the price aside, the private equity scene is very hot there right now and that is providing fuel to the listed equity market too. Technology companies are coming out with very big IPOs and it is very promising.