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$ to remain weak; China cheaper than India: Mark Matthews

Global markets are expected to rally Monday on the back of weaker-than-expected US jobs data which was released Friday. The employment data showed that the economy added 1,26,000 jobs in March compared to 2,95,000 jobs in February, the lowest since December 2013.

The weakness in data has sparked hope of a delay in the rate hikes by the US Federal Reserve. Speaking to CNBC-TV18, Mark Matthews of Bank Julius Baer & Co said the US jobs data is very weak and is bad only for the US market. He believes dollar weakness will continue going ahead. He expects S&P 500 to see lower levels. 

Matthews is anticipating the first rate hike by the US central bank in September rather than June.

On India, Matthews believes the bullishness on India market has been tempered by weak earnings. He does not see huge price gains in the market in near-term. According to him, Chinese market is much cheaper than India now.

Below is verbatim transcript of the interview:

Q: What have you made of the US job numbers, is it likely to take its tone?

A: Yes, I think it is and the futures are looking weaker today in the US as a result the dollar is lower, the treasury yields are lower so sometimes bad news is good news but if it is really bad then it is just plain bad news and that is what this is.

Q: How much can it impact emerging markets and markets like India? Do you think equity as an asset class itself takes a back seat, is the pecking order likely to change?

A: It is only bad for the US and I think the S&P will go down, it could easily go down in the order of 10 percent because it is not just this one data point that has been poor, the business and consumer confidence indicators have turned down.

Durable goods, orders, retail sales, everything in US has been softer-than-expected and the consensus for Q1 gross domestic product (GDP), which back in November was 3 percent, they expected the economy to grow 3 percent in Q1 — now they are only looking for 2 percent.

However, your question was related to India and emerging markets and that is the other side of the coin because one of the reasons why emerging markets have had such a hard time over the last six months is because of the dollar being strong.

If the dollar is now going to be weak, I think emerging markets are going to be strong regardless of what the US stock market does and in fact the largest emerging market ETF in New York was up almost 5 percent last week.

Q: What do you think the movement in the Indian market could be from hereon because we have had a fairly unimpressive month of March but last week, the market staged a bit of a recovery, what in your opinion is the trajectory that the Indian market could take from here?

A: I have been very bullish on India and I must confess that my bullishness has been tempered by the weak earning season. You cannot deny that the earnings report particularly in the banks, I think a lot of people myself included had expected more loans growth on the back of Prime Minister Modi coming in, the Modi wave and now we are closing in on a year since he has been in power.

In a couple of months that honeymoon is behind us and I don’t think India is bad but I think in the context of China, which is much cheaper and clearly on a tear that India doesn’t do a whole lot for the next few months.

Q: Are there any sectors that you prefer in India in spite of the numbers or would you just stay away?

A: I would be invested. We are invested as a firm but I am not looking at huge price game between now and even the end of the year.

In longer-term I still think it is a superb market for all the reasons that we have talked about in the past, the high return on equity, the very large and young population, the new government, infrastructure that is going to be built, it will all happen but not probably as fast as people had anticipated and therefore, I still own India but I don’t have such great expectations as I did a few months ago.

Q: Do you foresee any major correction in the Indian market because of the impending weak earnings that you just alluded to?

A: Not really, I don’t think it is disastrous by any stretch. However, the money that has been committed to India is pretty stable, I don’t think it is very hot or prone to flight.

However, I think that the marginal buyer would be more attracted to China right now in the emerging markets sphere and on balance that just means India is not in the limelight.

Q: Now that the jobs data is, as you pointed, not just bad but very bad data, what is your own sense of the Fed rate hike timing and what will be its attendant impact on markets up until that hike?

A: The timing is September but I don’t think the timing is the relevant question. Important thing is the delivery as the context of rate hike. In other words, is this the beginning of a long series of rate hikes or is it just one little dip of the toe in the water.

The message that Yellen has been sending is that this is going to be a small rate hike and we should not infer from previous cycles that this cycle is going to be an aggressive one.

I don’t want to quote her verbatim but she said something like ‘don’t think what they did back in 2005 or 1994, don’t think that we are going to do it that way. This will be a much more passive rate hike cycle.’

If they continue to provide the market with that message then you can never say for sure the market is totally immunised from rate hikes.

However, if it is in the context of an economy which is doing quite nicely and they only raise rates by say maximum 25 basis points then the market will just go sideways or down a bit in the months after it but eventually the force of the better economy would propel it upwards. So, I don’t think US is entering into a bear market but I think it is just taking a breather this year.

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