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bear market: Do not get suckered into a bear market rally; invest in realty, commodities or their proxies: Mark Matthews


“Right now, we are not in the same market we were a year or two years ago. The great bull market that lasted from the end of the global financial crisis up until November-December of last year has ended and exactly what is in front of us we do not know,” says Mark Matthews, MD, Julius Baer.

How much would you read into last week’s global market recovery with India joining the rebound?
It is better than I expected. Despite the volume being low, the breadth and the participation is good and we are just on the cusp of the lower end of where people might have to start short covering. If they do that, it could take the market up about another 8-10%. I do not exactly know how long the rally could last. It could end tomorrow, it could go on into July. I think it is a bear market rally and with the exception of companies that are either inflationary beneficiaries or hedged against inflation, would be selling into it.

In our earlier conversations as well, you have always made a very interesting point that elevated oil prices do not mean that that is going to take India down. The problem is that while agri inflation has eased off, prices of crude continue to hover around $120 to a barrel. Do you sense that Indian equity markets and crude could actually have a disconnect?
Actually at $120 a barrel, it is difficult but I would say the pain point which used to be at about $70 or $80 is definitely much higher and precisely where it is, I cannot say, but $120 is an issue despite the fact that pump prices are subsidised. There is a trickle through of higher energy prices into some or the other aspects of inflation including food because you need energy to make and distribute food; but it is not the only one.

So $120 a barrel is an issue but it is an issue for every other country in the world with the exception of a handful of commodity beneficiaries like Australia, Canada, South Africa, Indonesia.

If there is no recession in the US, it is going to be fantastic news for the global equity markets but it is a big week that is coming up for India. Our central bank will be meeting to discuss rates. While May has been brutal for the Indian equity markets, the velocity of the sell off by FIIs has come down. What do you make of that?
The biggest reason is that it is an emerging equity market and those are perceived to be risky and when the S&P itself is down about 13% or 14% so far this year, then it is really hard for anything to be up unless you are an outright beneficiary of inflation. But I want to also add that with China opening up again there is a chance it could start attracting some foreign capital. A lot of people will say oh I cannot invest in China anymore because of the geopolitics but I strongly suspect if it goes up, 10% will change their minds.

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Is that a footnote for a warning that brace yourselves for more heavy selling by FIIs in the weeks and months to come?
No actually I am looking for this rally to continue and so on that basis India would be included but I just want to say do not get suckered into it because I do not think we are in the beginning of a new bull market.

The other big worry here in India is that we have suddenly seen a spike in Covid cases locally and wondering whether tactically right now one should stay away from the entire hotel, hospitality, aviation kind of pockets and maybe be a little bit more skewed towards pathology or hospital stocks?
Well there have been upticks in other countries too and that has not really changed mobility patterns. The mobility patterns probably will not change unless there are lockdowns which you would know better than I do but I doubt that they are going to do that in India. Clearly if there is a major Covid resurgence, some people will change their minds but I think the majority probably have already got Covid and have been vaccinated and they just want to get on with things. So, I do not think it would be a major retardant for the economy.

When it comes to India, what are the other spaces that you are looking at, anything new after the recent correction that attracts or catches your eye?
In all honesty, I have not been looking at the market closely to see the kind of thing that you would like me to answer at. I better just skip the question. I apologise.

Given all of this and given that we are talking about a week where we may see rate hikes including in India, the European Union is also slated to have a lot of important meetings, what are you telling clients when it comes to staying invested in the equity markets? An analysis shows cash is outstripping what we saw in GFC and cash holdings are at post 9/11 level?
I will give you an interesting statistic. If you had $100,000 today and we have an inflation rate that is running at about 7% per year, in 10-years’ time, that would be worth $63,000. So, cash is not a very good viable long-term option. We should be invested in proxies for real assets or the real assets themselves and those are the things one can touch with own two hands like commodities, real estate, the proxies for them or the companies that produce them.

Some of that are listed on the exchange and that is the place to be invested in, not entirely but certainly have a healthy exposure to it. We have chosen Canada as our main way to do that but there are lots of other places in the world. You can do the same.

Where are you when it comes to this entire debate about growth stocks versus value stocks? Do you think the tech stocks, the new-age companies are going to stage a comeback?
Right now, we are not in the same market we were a year ago or two years ago. The great bull market that lasted from the end of the global financial crisis up until November-December of last year has ended and exactly what is in front of us we do not know. Eventually the cyclical bear market will end and a new up cycle start but I do not think anybody really knows what the leaders will be.

I do not think the large technology stocks will be the leaders simply because they are too large and it is difficult to grow when you are already that size. They can perform perfectly well in line with the market. They would not be the leaders. I would say one sector we have identified as being potential leader is the pharmaceutical sector where the major cost component for those companies is research and development and not raw materials.

They do have some raw material prices that are going up but it is not going to suppress their margins very much and we have noticed that after five years of underperformance, the pharmaceutical companies are now outperforming the broader market in United States and Europe.

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