I am literally pinching myself. Look at what we were reporting in the month of March versus what we are staring at right now. In March, it was panic and it was fear and we used the word financial Armageddon. Now the same folks are using words like carnival, FOMO and rally.
I don’t really know what to comment about that except that you should buy low and sell high. We always know the time to buy is when everybody is afraid and that is what March was. But to actually to go and do it takes tremendous courage and clearly a very few people have that courage because there is a great unknown. We could not have known back in March that fiscal and monetary response would have been as big as it was because our last experience with this kind of thing was the global financial crisis and it actually took the Federal Reserve between Bear Stearns and Lehman Brothers a good seven to eight months before they reacted. So if we had to wait seven months before a big intervention from the Federal Reserve and the government, for sure the market would have gone down a lot more. That is the thing you could not have really known back in March; except in retrospect, today we know it.
So what is the right way to approach this market because? Has the train left the station? Those who have missed the bus, should they now come in late assuming they will get something rather than waiting out which is not giving them anything?
The train was only on the station for one day. The amazing thing about the correction in March is that when you have that kind of a selloff, it takes between two to four months to build a base given that all the previous selloffs of that magnitude in history like 1987, 1974 and 1962. But what I want to say is that the market is going to go up. We think the S&P will take out new highs by the end of this month. The leadership will remain in the Nasdaq and there are a bunch of reasons.
One, the second quarter results have started coming up and there are about 20 companies that have beat the consensus expectation. Now I admit that 20 is a small number but 80% of them have beat expectations. So if you extrapolate that, it becomes a trend then that the earnings will not be as bad in the second quarter as people had thought. The second thing I would say is on the technical side, the breadth is very strong in the market. In fact 80% or more companies in America are trading above their 200-day moving average. If you look back in history, when you have that kind of positive momentum spread across a vast majority of stocks, in all instances the market was up 12 months later.
I think the actual virus itself is devastating now and there are 170 different organisations working on a vaccine. We think there will be a vaccine within six months. And then you have the recovery in economies; the most important one for global growth is China and specifically Taichen, which is their private service sector PMI which registered new orders in the month of June. It is 57.3, which is a very robust number. And given the service sector is 60% of their GDP, the private sector is 60% of their GDP as well and that shows you that China’s economy will be registering better numbers in the months ahead.
What do you buy in this market? How do you participate given how swift the rally has been? Where within the Indian context would you find deeper value given how sharp the run up has already been?
The value is in the midcaps and the banks and energy companies but that is not what is going to go up. We can take our lead from the United States for the last 10 years; it is more like eight years. The leadership has been in the technology sector and the great tragedy of Asia outside of China is that we surrendered all of our technology and new economy technology to America. So we hail Ubers and we watch Netflix and we use WhatsApp to call our friends. The only thing you have got that is anywhere near that is Reliance Industries Jio platforms and that is what is going to do well because it is going to gradually become the Nasdaq of India. It would not probably be listed in India. I imagine Jio platforms will be listed in the US unfortunately but that is the closest thing India has to what everybody wants. And that I think is what will continue to go up and become a much larger constituent of Reliance and a much larger constituent of the Nifty.
It is the rural economy that is seeing a faster recovery as opposed to the urban end of the market. Does it seem like this trend is here to stay or is this just an aberration till when you see a full unlocking of the economy?
I am not an epidemiologist but I suspect the reason for that is simply because the place for the virus is worst in Delhi and Mumbai and that is because of population density and the inability of people to practice social distancing the way they can compared to the rural areas where there is more fresh air and probably people eat more nutritious food. Anyway, I think there is sustainability to that trend if you look at the jobless numbers. They have significantly improved. In other words, unemployment dropped a lot in June over May and the PMI rose. As much as the virus is still a terrible problem in the two big cities, I imagine that it will probably pass through the rest of the country therefore those kinds of ideas like tractors have momentum.
What do you make of what is happening currently with regards to the spike that we have seen in Chinese markets and the vulnerability currently in the US markets? What is the potential risk that you are factoring in?
The Chinese market is in a bull market and it has been officially sanctioned two days ago by the government’s CCTV evening news, which is their biggest evening news programme. I cannot remember exactly what they said but they said that the bull market proves that the Chinese government has done an excellent job in handling the virus and in providing adequate stimulus and to me that is official approval of the bull market. One of the major financial newspapers The Securities Daily published a piece on Monday saying that the bull market is good because it will help the economy and that journal is also an official organ of the government. So the government condoned and approved this bull market. I think it has some momentum behind it because their PMIs are rebounding very strongly in June after already good numbers seen in May.
So yes, it can continue and the tragedy in my opinion is in Asia outside of China. There are no new economy stocks; just one or two in each market and some of them do not have any at all. But China has so many new economy stocks like Alibaba and JD and Tencent. But there are also dozens and dozens of others and they all have that same kind of interesting structural growth story that the likes of FAANGS do in the US and. Really outside of China and the US, you do not have that anywhere else in the world and that is what people want right now because that is growth.
Do you also see further fund interest in emerging markets? Where does India stack up vis-à-vis China at this point and going forward as well? What is the kind of potential that you see?
I think the biggest thing for the emerging markets is what the dollar is going to do. We went from being bullish on the dollar to being neutral on the dollar primarily because we were not expecting the response in Europe fiscal and monetary to be as strong. It will take them a month or two to implement actually; maybe more than that but it looks like they are getting their act together in the way that we had not foreseen. So we are neutral on the dollar, which is already a positive for emerging markets because a strong dollar will certainly be a hindrance to them and I think there are two primary reasons.
The first is that the emerging economies have dollar debts. So when the dollar goes up, it costs them more to service that and two, investors do not want to buy an emerging market if they think they are going to lose money in the currency. But what we are watching very closely is the momentum in the dollar and it looks like it is waning. It looks like the dollar is starting to rollover and it is premature to say at this point but it might be and if it is, that would be the best thing for Asia. But just to reiterate, the thing that really is a problem for Asia outside of China is the absence of new economy stocks and really to get a sustained rebound in these so-called cyclical stocks like banks, energy; lots and lots of things really are the backbone of most markets in Asia. You need a strong economy and I think it is premature to expect a strong economy given the coronavirus is still holding a lot of things back. So I do not think the leadership is in Asia but could be in China.
If you have to identify one asset class for the next couple of years and if I give you the option of buying an S&P ETF, Bitcoin or a brick of gold, where would you find merit in allocating capital for this decade?
Gold for me is the safest of those bets. Bitcoin might do much better but it is a highly volatile thing and the S&P is great. I think it is a great store of value over the long term but I would choose gold right now just because the wind is really in its sails with these extremely low interest rates probably looking at yield curve control in much of the world. Certainly there is a lot of geopolitical instability which is favourable for gold and potentially weakness in the dollar too. So I do not think that it is going to double. But I think it could continue to give us about 6% or 7% per year in dollar terms and that is what it has returned. Let us call it over the last five years or so and that would be enough for me because it is a pretty safe investment too.