Speaker 1: All right, thanks very much, Denise. The time seven minutes
Speaker 1: past the hour. Our guest is Vikas Purshad, fund manager
Speaker 1: at MG Investments. Well, it seems like rising real yields
Speaker 1: are sweeping through the U S economy, at least at
Speaker 1: the moment, and no doubt elsewhere. One would think that
Speaker 1: this will lead to rising costs for companies and and
Speaker 1: earnings downgrades, which you haven't seen that much of yet.
Speaker 1: I don't think that's fully discounted. What does that affect
Speaker 1: the most and what's generally more secure? Hi, good morning everyone.
Speaker 1: I think what that affects most is the equity prices
Speaker 1: that are most vulnerable, are the ones that have risen
Speaker 1: the most and that are most dependent on consumer spending
Speaker 1: and energy costs. So that but this is not a
Speaker 1: small universe of companies. So what has changed since the
Speaker 1: last time we spoke about seven weeks ago, is that
Speaker 1: we have seeing an appreciation and equity prices in the
Speaker 1: face of a deteriorating earnings outlook. So last time we spoke,
Speaker 1: we thought the weakness in the June quarter would most
Speaker 1: certainly continue into the September quarter. But I think we
Speaker 1: have now questions about whether the December quarter will see
Speaker 1: an improvement. I think on the balance of probabilities that
Speaker 1: it's probably not going to happen. So we we we
Speaker 1: think that the the outlook for earnings has deteriorated since
Speaker 1: the middle part of the summer, and you couple that
Speaker 1: with the rise the appreciation and equity prices, and and
Speaker 1: the various sectors look vulnerable here because you say one
Speaker 1: of the biggest risks is, of course the related impact
Speaker 1: on energy costs from what we're seeing in Europe. Is
Speaker 1: that just as big of a concern in terms of
Speaker 1: aggressive FED hikes too, I would agree, yes. So I
Speaker 1: think this has not been a normal summer. It's actually
Speaker 1: not been a normal year. And the risk that we
Speaker 1: are seeing our general the broad based, their systemic rising
Speaker 1: energy prices, the rising cost of money, rising inflation, all
Speaker 1: happening at the same time. Uncertainty has gone up. And
Speaker 1: one thing that we have spoken about often is the
Speaker 1: how companies are smarter, the balance sheets are healthier, people
Speaker 1: are thinking about the right things. But when you have
Speaker 1: this confluence of risks all the same time, significant risk
Speaker 1: all at the same time, I think it it's going
Speaker 1: to pose some challenges for uh. Yeah, please, Well, I
Speaker 1: mean the point you just made raises the question of
Speaker 1: why we're not seeing a bigger sell off, and it
Speaker 1: suggests that either companies and consumers have strong balance sheets,
Speaker 1: or that there is a lot of underlying strength in
Speaker 1: the economy that we're just not highlighting. Well, I think
Speaker 1: it's a bit of both. And if you look at
Speaker 1: where consumers are spending, if you look at flights, if
Speaker 1: you look at restaurants, if you look at um travel hotels,
Speaker 1: that is pretty strong across the region and around the world.
Speaker 1: But you look at certain other categories and the consumers pinched.
Speaker 1: And I think when we look at things like a
Speaker 1: basket of commodities for inflation, consumers are very diverse, even
Speaker 1: within a particular geography, but certainly across the region and
Speaker 1: around the world. So I think we have to take
Speaker 1: that into consideration. You look at the market like India,
Speaker 1: where purchasing power is very concentrated, it you see a
Speaker 1: headline number of one point three one point four billion,
Speaker 1: that's that's very different from where the purchasing power is
Speaker 1: and and so we need to be careful of that.
Speaker 1: And so I think in general, inaggregate, the risks have
Speaker 1: risen since maybe the Midsummer and a couple with the battle,
Speaker 1: as you say, between inflation and priceia capital is the
Speaker 1: impact of the strong dollar. How much does that kind
Speaker 1: of I guess give a bigger head win for Asia.
Speaker 1: Well if we if we now move from west to
Speaker 1: east and we look at Japan for example. So for exporters,
Speaker 1: pretty good environment, you're selling, most of the costs are domestic,
Speaker 1: it denominated. End you're getting much higher dollar based revenue.
Speaker 1: But I think for the consumer, the their importing inflation
Speaker 1: with these higher energy costs, with the higher input costs,
Speaker 1: and for them it's it's going to be more challenging
Speaker 1: At the end. It comes back to the consumer, and
Speaker 1: I think you're going to see vote ability in sectors
Speaker 1: that are directly or related to the consumer, whether it's
Speaker 1: consumer staples, pricing hikes. Some market participants are getting excited
Speaker 1: about pricing hightstick pricing hikes sticking. I don't see that happening,
Speaker 1: and not just in Japan but across the region. At
Speaker 1: some point these companies are going to see margin compression
Speaker 1: because they can't just keep hiking prices. Does the upcoming
Speaker 1: Communist Party Congress offer a quick fix and potentially and
Speaker 1: move away from COVID zero. But I think given the
Speaker 1: size of the China economy and the growth targets that
Speaker 1: they have set, I'm not quite sure that any one
Speaker 1: meeting has a big impact. So our focus is on
Speaker 1: more than intermediate to longer term. There probably will be
Speaker 1: some some pro growth initiatives that are launched. There might
Speaker 1: be also some short term reset of expectations in the
Speaker 1: short term, but I really don't think, given the size
Speaker 1: of that economy, that one meeting can really have that
Speaker 1: much of an impact anymore. Some in the marketplace think
Speaker 1: it's a myth that the PBOC is trying to uh
Speaker 1: to to put a floor under the rem M B
Speaker 1: because even with these strong fixes, they are seemingly allowing
Speaker 1: it to continue to weekend ever closer to seven to
Speaker 1: the green back. What do you think is a level
Speaker 1: from which they really will try to stop the decline.
Speaker 1: I think on specific levels, it's it's hard to have
Speaker 1: a view there, I think, But but this is something
Speaker 1: that we think about often in in the context of currencies.
Speaker 1: I think King dollar is called king dollar for a reason,
Speaker 1: and you look at the relative dependencies on energy costs,
Speaker 1: energy imports, and the reserve currency status and so relative
Speaker 1: to this. So if you don't look at the remnant
Speaker 1: be in isolation or the yen in isolation, or the
Speaker 1: Rupean isolation, but compared to the dollar and other currencies,
Speaker 1: I think that's something that we were reevaluating how how
Speaker 1: long this can continue. When when I was on two
Speaker 1: months ago, my thought was from that as a starting point,
Speaker 1: I would expect to see in dollar terms Asian current
Speaker 1: Asian indices, I'll perform the western markets of the SMP
Speaker 1: in particular. I think even what we're seeing that's something
Speaker 1: that we're questioning a new You talked earlier about some
Speaker 1: of the calls that you have. I know you mentioned India.
Speaker 1: I just wanted to get more of your thoughts on
Speaker 1: on some of these sectors that you are going long on,
Speaker 1: because steel and cement are in that basket, and that's
Speaker 1: obviously on on construction, on industry. Just tell us a
Speaker 1: little bit behind this call. Yes, of course, So India
Speaker 1: in general is a fascinating market right now, and it's
Speaker 1: also a bit trickier because I don't think there's a
Speaker 1: market in Asia where we have a more positive long
Speaker 1: term view coupled with a short term rally and markets
Speaker 1: and and stocks that have gone from being pricing to
Speaker 1: perhaps even expensive. Now the sectors that you mentioned, in
Speaker 1: particular steel and cement. If you look five to ten
Speaker 1: years out, the number of airports being built, the roads
Speaker 1: being built, the hospitals, the things around roads, hospitals and airports,
Speaker 1: all that is going to the demand there is going
Speaker 1: to far exceed the supply and the pace at which
Speaker 1: supply can come on. So that is very positive. I
Speaker 1: think in the short term energy, these energy impacts that
Speaker 1: we're talking about in the June quarter that will continue
Speaker 1: the September quarter. I think that's going to bleed into
Speaker 1: the December quarter. All the stocks have rallied materially from
Speaker 1: the June lows, and so that's why I think it's
Speaker 1: it's an interesting time to be looking at these What
Speaker 1: I can tell you is that we have reduced our
Speaker 1: exposure a little bit at the margin for now given
Speaker 1: the rally that we've seen and the incremental information that
Speaker 1: we've gotten on their cost structures. But it's not been
Speaker 1: a drastic change because the outlook for the longer term
Speaker 1: is very positive. Yeah, but the SENSEX, as you say,
Speaker 1: is expensive trading. It more than twenty two times earnings UM.
Speaker 1: There may have been also a little bit of um
Speaker 1: a false signal sent by the strong GDP report because
Speaker 1: of how weak it was, how weak growth was because
Speaker 1: of COVID the one year ago. I I agree with that,
Speaker 1: so we started from a low base on the g
Speaker 1: D report report, on the GDP report, we started from
Speaker 1: a low base and equity prices at the end of June.
Speaker 1: So in the past couple of months we've seen a
Speaker 1: signaturant rally there and I would say up until maybe
Speaker 1: late July early August, a lot of the bounce back
Speaker 1: across sectors in India was sensible, it could be justified.
Speaker 1: I think what we've seen since then is things look
Speaker 1: a little bit stretched. So our cash levels in Indian
Speaker 1: in particular a little bit higher than they have been
Speaker 1: in recent months. Alright, Vicas, thanks for joining us. We'll
Speaker 1: see you on TV in a couple of hours too,
Speaker 1: because my share fund manager at MG Investment on the
Speaker 1: line from Singapore for us here on Bloomberg Daybreak Asia