WEBVTT - Vikas Pershad on the Markets (Audio)

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<v Speaker 1>All right, thanks very much, Denise. The time seven minutes

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<v Speaker 1>past the hour. Our guest is Vikas Purshad, fund manager

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<v Speaker 1>at MG Investments. Well, it seems like rising real yields

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<v Speaker 1>are sweeping through the U S economy, at least at

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<v Speaker 1>the moment, and no doubt elsewhere. One would think that

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<v Speaker 1>this will lead to rising costs for companies and and

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<v Speaker 1>earnings downgrades, which you haven't seen that much of yet.

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<v Speaker 1>I don't think that's fully discounted. What does that affect

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<v Speaker 1>the most and what's generally more secure? Hi, good morning everyone.

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<v Speaker 1>I think what that affects most is the equity prices

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<v Speaker 1>that are most vulnerable, are the ones that have risen

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<v Speaker 1>the most and that are most dependent on consumer spending

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<v Speaker 1>and energy costs. So that but this is not a

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<v Speaker 1>small universe of companies. So what has changed since the

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<v Speaker 1>last time we spoke about seven weeks ago, is that

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<v Speaker 1>we have seeing an appreciation and equity prices in the

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<v Speaker 1>face of a deteriorating earnings outlook. So last time we spoke,

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<v Speaker 1>we thought the weakness in the June quarter would most

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<v Speaker 1>certainly continue into the September quarter. But I think we

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<v Speaker 1>have now questions about whether the December quarter will see

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<v Speaker 1>an improvement. I think on the balance of probabilities that

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<v Speaker 1>it's probably not going to happen. So we we we

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<v Speaker 1>think that the the outlook for earnings has deteriorated since

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<v Speaker 1>the middle part of the summer, and you couple that

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<v Speaker 1>with the rise the appreciation and equity prices, and and

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<v Speaker 1>the various sectors look vulnerable here because you say one

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<v Speaker 1>of the biggest risks is, of course the related impact

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<v Speaker 1>on energy costs from what we're seeing in Europe. Is

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<v Speaker 1>that just as big of a concern in terms of

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<v Speaker 1>aggressive FED hikes too, I would agree, yes. So I

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<v Speaker 1>think this has not been a normal summer. It's actually

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<v Speaker 1>not been a normal year. And the risk that we

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<v Speaker 1>are seeing our general the broad based, their systemic rising

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<v Speaker 1>energy prices, the rising cost of money, rising inflation, all

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<v Speaker 1>happening at the same time. Uncertainty has gone up. And

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<v Speaker 1>one thing that we have spoken about often is the

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<v Speaker 1>how companies are smarter, the balance sheets are healthier, people

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<v Speaker 1>are thinking about the right things. But when you have

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<v Speaker 1>this confluence of risks all the same time, significant risk

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<v Speaker 1>all at the same time, I think it it's going

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<v Speaker 1>to pose some challenges for uh. Yeah, please, Well, I

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<v Speaker 1>mean the point you just made raises the question of

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<v Speaker 1>why we're not seeing a bigger sell off, and it

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<v Speaker 1>suggests that either companies and consumers have strong balance sheets,

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<v Speaker 1>or that there is a lot of underlying strength in

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<v Speaker 1>the economy that we're just not highlighting. Well, I think

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<v Speaker 1>it's a bit of both. And if you look at

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<v Speaker 1>where consumers are spending, if you look at flights, if

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<v Speaker 1>you look at restaurants, if you look at um travel hotels,

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<v Speaker 1>that is pretty strong across the region and around the world.

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<v Speaker 1>But you look at certain other categories and the consumers pinched.

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<v Speaker 1>And I think when we look at things like a

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<v Speaker 1>basket of commodities for inflation, consumers are very diverse, even

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<v Speaker 1>within a particular geography, but certainly across the region and

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<v Speaker 1>around the world. So I think we have to take

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<v Speaker 1>that into consideration. You look at the market like India,

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<v Speaker 1>where purchasing power is very concentrated, it you see a

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<v Speaker 1>headline number of one point three one point four billion,

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<v Speaker 1>that's that's very different from where the purchasing power is

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<v Speaker 1>and and so we need to be careful of that.

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<v Speaker 1>And so I think in general, inaggregate, the risks have

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<v Speaker 1>risen since maybe the Midsummer and a couple with the battle,

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<v Speaker 1>as you say, between inflation and priceia capital is the

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<v Speaker 1>impact of the strong dollar. How much does that kind

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<v Speaker 1>of I guess give a bigger head win for Asia.

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<v Speaker 1>Well if we if we now move from west to

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<v Speaker 1>east and we look at Japan for example. So for exporters,

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<v Speaker 1>pretty good environment, you're selling, most of the costs are domestic,

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<v Speaker 1>it denominated. End you're getting much higher dollar based revenue.

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<v Speaker 1>But I think for the consumer, the their importing inflation

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<v Speaker 1>with these higher energy costs, with the higher input costs,

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<v Speaker 1>and for them it's it's going to be more challenging

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<v Speaker 1>At the end. It comes back to the consumer, and

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<v Speaker 1>I think you're going to see vote ability in sectors

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<v Speaker 1>that are directly or related to the consumer, whether it's

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<v Speaker 1>consumer staples, pricing hikes. Some market participants are getting excited

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<v Speaker 1>about pricing hightstick pricing hikes sticking. I don't see that happening,

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<v Speaker 1>and not just in Japan but across the region. At

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<v Speaker 1>some point these companies are going to see margin compression

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<v Speaker 1>because they can't just keep hiking prices. Does the upcoming

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<v Speaker 1>Communist Party Congress offer a quick fix and potentially and

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<v Speaker 1>move away from COVID zero. But I think given the

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<v Speaker 1>size of the China economy and the growth targets that

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<v Speaker 1>they have set, I'm not quite sure that any one

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<v Speaker 1>meeting has a big impact. So our focus is on

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<v Speaker 1>more than intermediate to longer term. There probably will be

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<v Speaker 1>some some pro growth initiatives that are launched. There might

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<v Speaker 1>be also some short term reset of expectations in the

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<v Speaker 1>short term, but I really don't think, given the size

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<v Speaker 1>of that economy, that one meeting can really have that

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<v Speaker 1>much of an impact anymore. Some in the marketplace think

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<v Speaker 1>it's a myth that the PBOC is trying to uh

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<v Speaker 1>to to put a floor under the rem M B

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<v Speaker 1>because even with these strong fixes, they are seemingly allowing

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<v Speaker 1>it to continue to weekend ever closer to seven to

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<v Speaker 1>the green back. What do you think is a level

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<v Speaker 1>from which they really will try to stop the decline.

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<v Speaker 1>I think on specific levels, it's it's hard to have

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<v Speaker 1>a view there, I think, But but this is something

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<v Speaker 1>that we think about often in in the context of currencies.

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<v Speaker 1>I think King dollar is called king dollar for a reason,

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<v Speaker 1>and you look at the relative dependencies on energy costs,

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<v Speaker 1>energy imports, and the reserve currency status and so relative

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<v Speaker 1>to this. So if you don't look at the remnant

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<v Speaker 1>be in isolation or the yen in isolation, or the

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<v Speaker 1>Rupean isolation, but compared to the dollar and other currencies,

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<v Speaker 1>I think that's something that we were reevaluating how how

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<v Speaker 1>long this can continue. When when I was on two

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<v Speaker 1>months ago, my thought was from that as a starting point,

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<v Speaker 1>I would expect to see in dollar terms Asian current

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<v Speaker 1>Asian indices, I'll perform the western markets of the SMP

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<v Speaker 1>in particular. I think even what we're seeing that's something

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<v Speaker 1>that we're questioning a new You talked earlier about some

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<v Speaker 1>of the calls that you have. I know you mentioned India.

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<v Speaker 1>I just wanted to get more of your thoughts on

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<v Speaker 1>on some of these sectors that you are going long on,

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<v Speaker 1>because steel and cement are in that basket, and that's

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<v Speaker 1>obviously on on construction, on industry. Just tell us a

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<v Speaker 1>little bit behind this call. Yes, of course, So India

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<v Speaker 1>in general is a fascinating market right now, and it's

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<v Speaker 1>also a bit trickier because I don't think there's a

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<v Speaker 1>market in Asia where we have a more positive long

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<v Speaker 1>term view coupled with a short term rally and markets

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<v Speaker 1>and and stocks that have gone from being pricing to

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<v Speaker 1>perhaps even expensive. Now the sectors that you mentioned, in

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<v Speaker 1>particular steel and cement. If you look five to ten

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<v Speaker 1>years out, the number of airports being built, the roads

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<v Speaker 1>being built, the hospitals, the things around roads, hospitals and airports,

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<v Speaker 1>all that is going to the demand there is going

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<v Speaker 1>to far exceed the supply and the pace at which

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<v Speaker 1>supply can come on. So that is very positive. I

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<v Speaker 1>think in the short term energy, these energy impacts that

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<v Speaker 1>we're talking about in the June quarter that will continue

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<v Speaker 1>the September quarter. I think that's going to bleed into

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<v Speaker 1>the December quarter. All the stocks have rallied materially from

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<v Speaker 1>the June lows, and so that's why I think it's

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<v Speaker 1>it's an interesting time to be looking at these What

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<v Speaker 1>I can tell you is that we have reduced our

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<v Speaker 1>exposure a little bit at the margin for now given

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<v Speaker 1>the rally that we've seen and the incremental information that

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<v Speaker 1>we've gotten on their cost structures. But it's not been

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<v Speaker 1>a drastic change because the outlook for the longer term

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<v Speaker 1>is very positive. Yeah, but the SENSEX, as you say,

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<v Speaker 1>is expensive trading. It more than twenty two times earnings UM.

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<v Speaker 1>There may have been also a little bit of um

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<v Speaker 1>a false signal sent by the strong GDP report because

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<v Speaker 1>of how weak it was, how weak growth was because

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<v Speaker 1>of COVID the one year ago. I I agree with that,

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<v Speaker 1>so we started from a low base on the g

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<v Speaker 1>D report report, on the GDP report, we started from

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<v Speaker 1>a low base and equity prices at the end of June.

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<v Speaker 1>So in the past couple of months we've seen a

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<v Speaker 1>signaturant rally there and I would say up until maybe

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<v Speaker 1>late July early August, a lot of the bounce back

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<v Speaker 1>across sectors in India was sensible, it could be justified.

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<v Speaker 1>I think what we've seen since then is things look

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<v Speaker 1>a little bit stretched. So our cash levels in Indian

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<v Speaker 1>in particular a little bit higher than they have been

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<v Speaker 1>in recent months. Alright, Vicas, thanks for joining us. We'll

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<v Speaker 1>see you on TV in a couple of hours too,

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<v Speaker 1>because my share fund manager at MG Investment on the

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<v Speaker 1>line from Singapore for us here on Bloomberg Daybreak Asia