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    China's crackdown on ed tech cos could be India’s gain: Mark Matthews

    Synopsis

    “People who are selling China will go into something safe like cash and will look to redeploy it in countries outside of the United States that have new economy stories. India with healthy pipeline of internet IPOs falls into that category.”

    Mark Matthews-NEW-1200ETMarkets.com
    Matthews said the Indian equity markets may continue its northward journey as the earnings growth is supportive and projected that the Sensex may hit 58,500 level by March next year.
    China might end up being a vanguard or pioneer in the swing of the pendulum away from capital toward labour. If China can take on the tech giants, maybe others will think they can do the same thing, says Mark Matthews, MD, Julius Baer.


    The last time we interacted, the big worry in the world was inflation. Today the worry in the world is slow growth. What is going on?
    Well what is going on is the Purchasing Managers Indices are all coming down and I do not think that is any problem because they are coming down from levels that were never sustainable. If you look at America for example, PMI above 60 has really happened only three times in the last 30 plus years. Now we are back in the high 50s, which is still a very high number but PMIs lead the economy and so they give us a pretty clear signal that the growth did peak in June. I do not see any cause for concern. It had to peak at some point and that does not mean it is going away. It just would not be as big as it was before.

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    Could there be a snowball effect of what is happening in the Chinese internet/tech companies because that is one big pocket where billions of dollars of market cap got eroded? Could it be a problem for leverage traders?
    I imagine that the first step for people who are selling China will be just to go into something safe like cash because they have just been scared by quite unexpected and unprecedented events and they do not quite know what to do; they are a bit shocked. So they will move their money into cash but then they are looking to redeploy it in countries outside of the United States that have new economy stories and I think India falls into that category. The size, of course, is totally different. India’s new economy is tiny in terms of the offering compared to China but there is a healthy IPO pipeline and so it will end up benefiting countries like India rather than being a net negative.

    It might prove to be net positive for India. But to what extent, would this be actually implemented? China has been very pro business, a pro sell to the world kind of a country. Do you think that it is just simply a misunderstanding of policies? In case of India, will internet IPOs be the best way to play the change in China’s policy?
    They will be but I also think that in a strange way, although China is under great criticism, it might end up being the sort of vanguard or pioneer in a swing of the pendulum away from capital toward labour. This is a multi-year process but I believe it has already started. It started some time ago but it is a sort of part of that in the sense that if China can take on the tech giants, maybe others will think they can do the same thing.

    In America, politicians from Bernie Sanders to Donald Trump have been wanting to try to level the playing field for smaller companies. The massive tech monopolies do not continue to exert such total control and dominance and in a weird way, China is doing that. They are saying pay your drivers more. I do not know who can disagree with that? Pay people who work in the warehouses right, give your young people some time, so they do not have to live this rat race lifestyle. They call it the 996 lifestyle in China, 9 in the morning till 9 at night 6 days a week. In the end the worker is so tired, they cannot even have any children. So, who really can criticise that? Maybe what China is doing is something that the rest of the world will be doing too in a couple of years.

    But to answer your question, in India, the way to play it is the healthy IPO pipeline. There is just so much growth and the digitalisation of the Indian economy but these sorts of things will come into the conversation over time too. You have to make sure the digitalisation of the economy does not have such a big impact on society that it just ends up making people miserable.

    It is largely on account of China that we have seen the emerging market (EM) pack underperform the developed markets (DMs). How do you see India as well stack up?
    It was such a big surprise when the big Covid wave happened in India in April and May. Yet the Sensex did not go down very much and now it is trading higher than it was before. Countries like Thailand, Malaysia, Indonesia have been hit badly by a same kind of second wave and their stock markets are quite solid too.

    So, I do not know the reason why but markets are willing to look through this. They are willing to believe that it would not last for a very long time and that these economies will bounce back. And in the meantime, we have, thanks to the Federal Reserve, a global situation, where money is practically free to borrow. The market is willing to believe that there is light at the end of the tunnel. India has taught us that in a way, the vaccination programme is much more robust than expectations were a few months ago and we have not had a big wave again. We know the economy is much more prepared for it, if it does come. So I presume that people are extrapolating the same for the other emerging markets.

    There was much excitement in India last week when one of the first new age digital Indian internet companies Zomato got listed. What do you think is the scope for such companies wherein perhaps valuations are not the right metrics to try and gauge where these stocks may move in the next five to ten years?
    The first thing I would say is that they are the best way to play the digitalisation of the economy. The economy industrialised in the world throughout the 19th century and the 20th century. Now it is digitalising. When it was industrialising, you did not want to own the companies that were making buggy whips, you wanted to own the companies that were making the petroleum and the cars. This is the same thing this time, only with companies like Zomato.

    I guess the question could be asked how much value addition are you really bringing to the economy when a bunch of people go around on motorcycles delivering food. That is what China is doing now too. They are thinking, do we really want our best and brightest going into the consumer space when arguably they could be dedicating their smart brains toward artificial intelligence and genomics and other things that are more valuable for the country?

    That debate will be ongoing because China is taking the first steps in that direction. But in India, there is so much room really to move up this ladder in terms of digitalisation across multiple sectors that I think it is an investable space and the best way to play it is this upcoming IPO pipeline.

    So what happens to traditional Indian sectors like pharmaceuticals, steel, oil and gas? Do you think there is going to be a large tectonic shift?
    The traditional companies still have an important place in the portfolio because the economy is strong in India and those are cyclical companies and their profits go up and down depending on the strength of the economy. We are expecting the economy to be strong this year and strong again next year. In China, the economy has become quite developed already. There is much more room for growth in India in real economy sectors like the ones you have mentioned. I do not think overnight these internet companies in India are going to be 40% of the market cap, which they got in the MSCI China Index.

    Also, there is a lot of room for the so-called real economy companies to digitalise too. So, there will be companies that are more ahead of the curve, more adaptive to technologies and in every sector, those are the ones to go for.

    For an investor right now there are two options; bet on equities which in a sense are already overbought or stay with bonds where the risk of a spike in inflation is coming back. How should one balance the two?
    We are about 55% in equities and 35% in bonds and the remainder would be in cash and alternatives and the reason is that equities tend to have superior performance over time and yields are so low now that it is difficult to imagine any capital gains in bonds. Also the interest rate you will get from the bonds is quite low. But we do have an allocation to bonds because the world is a funny place and it is good to be somewhat diversified. Who knows there could be some new variant of Covid that could come out and take the world into another tailspin!
    There could be a war, there could be all kinds of things and it is really quite difficult to know.

    Within the bonds space, there are a few pockets where the risk and reward is still good and one such opportunity is in the high yield market, in emerging markets places like Latin America and the Middle East where we find very good yields. Meanwhile, in economies that are recovering but on balance, we are more on the equity side than the bond side.

    If you have to give investors an option to buy three ETFs for next five-seven years irrespective of the asset class or the region or the complexity, which of the three ETF instruments would you like to buy?
    One is the S&P500. It is the SPDR, the biggest ETF in the world. S&P is just a wonderful fund manager itself. It is an index that naturally pushes the best companies up to the top and that is why if you look back in history, the largest companies in the US stock market are different every single decade. 30-40 years ago, it would have been Exxon. Today, it is these internet companies. Ten years from now, it will be something else. But whatever it is, the S&P itself will make sure that you are benefiting from that because it is weighted by market cap and so good companies in America are rewarded by higher share prices. They do not have big state owned enterprises or a lot of government interference.

    I would also say that there is a lot of shock about Chinese internet now. The internet is not the only part of the Chinese market, there are very large parts of that market that have quite good stories like the consumption story and the renewable energy story. Then there is the healthcare story and all those actually have ETFs that one can buy in Hong Kong. So those are some of the ideas that I would pursue.

    What are the areas that you would stay away from? Which are the sectors you think are overvalued where the positive news has been factored in?
    There is clearly a lot of froth in certain pockets of the new economy and I am talking about the specs and the crypto currencies and the electric vehicles and that kind of thing. But it is a bull market and in a bull market pretty much everything goes up. So, I am not so sure that just because things are expensive, they are going to go down. On balance, I would say that if the economy is still growing but not growing strongly, then the cyclical component may go down, but it may lag the more structural elements like the FAANGS.

    How real a threat do you think is the new variant of the virus spreading across different parts of the world? It is complicating the US economic recovery as well. Should investors be a little cautious?
    The problem is not about this particular variant where clearly the vaccine efficacy is not as robust as the original variants. There are some breakthroughs but those are not high enough to pose the material risk if the vaccination rate is as high as in most of the western world. I am more worried that there are still very large parts of the world that are in full fledged pandemic mode like in Southeast Asia and Africa. So yes, I do believe that Covid is a very significant risk still and ironically it is probably going to be used as an excuse by the Federal Reserve tonight to explain why they need to keep their monetary policy very loose.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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