bear market: don’t get caught up in a bear rally; investing in real estate, commodities or their proxies: Mark Matthews

“Right now, we’re not in the same market as a year or two ago. The big bull market that lasted from the end of the global financial crisis until November-December last year is over and we don’t know exactly what lies ahead,” says Mark Matthewsdoctor, Julius Baer.

How about last week’s global market rally with India joining the rebound?
It’s better than what I expected. Although the volume is low, the breadth and participation are good and we are just at the lower end of where people might need to start hedging in the short term. If they do, it could push the market up around 8-10%. I don’t know exactly how long the rally could last. It could end tomorrow, it could go on until July. I think this is a bear market and except for companies that benefit from inflation or are inflation hedged, they would sell there.

Also in our previous conversations, you always made a very interesting point that high oil prices don’t mean it’s going to bring India down. The problem is that while agricultural inflation has eased, crude prices continue to hover around $120 a barrel. Do you have a feeling Indian stock markets and crude might actually have a disconnect?
Actually at $120 a barrel it’s tough but I would say the pain point that was around $70 or $80 is definitely much higher and precisely where it is I can’t say but $120 is a problem despite the fact that pump prices are subsidized. Rising energy prices affect some or other aspects of inflation, including food, because you need energy to make and distribute food; But it’s not the only one.

So $120 a barrel is a problem, but it’s a problem for every other country in the world except a handful of commodity recipients like Australia, Canada, South Africa South and Indonesia.

If there is no recession in the United States, it will be great news for global equity markets, but it is a big week ahead for India. Our central bank will meet to discuss rates. While May was a brutal month for Indian equity markets, FII selling velocity slowed. What do you think ?
The main reason is that it is an emerging stock market and these are seen as risky and when the S&P itself is down about 13% or 14% so far this year, it’s really hard for anything to go up unless you’re an absolute beneficiary of inflation. But I also want to add that with the reopening of China, there is a chance that it will start attracting foreign capital. A lot of people will say oh I can’t invest in China anymore because of geopolitics but I strongly suspect that if it goes up 10% will change their minds.

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Is this a footnote to a warning that prepares you for greater sales by FII in the weeks and months to come?
No actually I want this rally to continue and so on that basis India would be included but I just want to say don’t get carried away as I don’t think we are at the start of a new bull market.

The other big concern here in India is that we have suddenly seen a spike in Covid cases locally and we are wondering if tactically right now to stay away from all hotel, hospitality , aviation type pouches and maybe be a bit more biased towards pathology or hospital stocks?
Well, there have been increases in other countries as well and it hasn’t really changed mobility patterns. Mobility patterns probably won’t change unless there are blockages that you know better than I do, but I doubt they will in India. Clearly if there is a major Covid resurgence some people will change their minds but I think the majority have probably already caught Covid and been vaccinated and just want to move on. So I don’t think it would be a major retarder for the economy.

Regarding India, what other spaces are you looking at, something new after the recent correction that catches or grabs your attention?
In all honesty, I haven’t looked at the market closely to see the kind of thing you want me to answer. I better skip the question. I apologize.

Given all of this and given that we are talking about a week where we could see rate hikes, including in India, the European Union is also expected to have many important meetings, what do you say to clients when it is it to stay invested in the stock market? Analysis shows cash is above what we saw in GFC and cash holdings are at post-9/11 levels?
I’ll give you an interesting statistic. If you had $100,000 today and we have an inflation rate of about 7% per year, 10 years from now it would be worth $63,000. Thus, silver is not a very good viable long-term option. We should be invested in proxies for the real assets or the real assets themselves and these are the things one can touch with one’s own hands like commodities, real estate, proxies for them or companies that produce them.

Some of them are publicly traded and this is the place to invest, not entirely, but definitely healthy exposure. We’ve chosen Canada as the primary way to do this, but there are plenty of other places around the world. You can do the same.

Where are you in this whole debate about growth stocks versus value stocks? Do you think tech stocks, new-age companies will make a comeback?
Right now we are not in the same market as a year or two ago. The great bull market that lasted from the end of the global financial crisis until November-December last year is over and we don’t know exactly what lies ahead. Eventually the cyclical bear market will end and a new bull cycle will begin, but I don’t think anyone really knows who the leaders will be.

I don’t think the big tech stocks will be the leaders just because they’re too big and it’s hard to grow when you already have that size. They can perfectly behave in line with the market. They would not be the leaders. I would say that one sector that we have identified as a potential leader is the pharmaceutical sector where the main cost component for these companies is research and development and not raw materials.

They have rising commodity prices, but that won’t squeeze their margins much and we’ve noticed that after five years of underperformance, pharma companies are now outperforming the broader market in the US and Europe.

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