Worried about Chinese policy and currency action: Pankaj Tibrewal, Kotak Mutual Fund

In a chat with ET Now, Pankaj Tibrewal, Fund Manager - Equity, Kotak Mutual Fund, says global markets have been too calm for too long and that means someday something may come up suddenly. Edited excerpts

ET Now: There was a big move in the last couple of trading sessions, a fantastic 5 per cent rally. But now the market has eased off. What according to you could be the next triggers considering the earning season has actually surprised us and we are almost at the fag-end?

Pankaj Tibrewal: Clearly from market perspective, the first leg of re-rating seems to have been done and our view is that in the near term clearly on the domestic side, monsoons will play a very important role giving a direction to the markets and there are couple of global events lined up -- there could be a Fed hike in June or July. Most think a July rate hike is likely. Then, there is a referendum on the Britain exit from the euro zone. These events will give a clue on the markets in terms of direction. As you rightly said, after so many quarters, we have seen the first signs of recovery on the corporate earning side. If you remove on the Nifty side, a few of the corporate lenders, whether from PSU or from the private sector, clearly the Nifty earnings actually have moved to the early double digits. So that is a very encouraging and healthy sign and I think markets have taken a clue and post last week’s rally of about 5 per cent, clearly we have become one of the best performing markets in Asia and in line with some of the global markets like Dow Jones of the US. So clearly that is something which is being getting noticed now by the FII investors as well. Some of them were running underweight positions in India.

ET Now: The whole month of May was dominated by what US Fed could do in June. Friday evening, Janet Yellen clearly has made a case for a rate hike. Historically, every time when markets know that out-of-turn rate hike is coming, markets have panicked. But despite a very hawkish comment from US Fed, there is no panic in any of the major markets. European markets are strong. US markets closed higher on Friday and Asian markets are also holding on.

Pankaj Tibrewal: Absolutely. I mean slowly and gradually, the market is discounting the commentary coming out of Fed. Earlier, there was expectation at the start of the year there will be three or four hikes. Now the first hike has happened and the expectation is may be one or two more hikes. If you look at the Fed’s funds expectation now, it implies a 30 per cent probability for a June hike and 55 per cent probability for a July hike. So I think the Fed would wait for the outcome of the Britain exit referendum which will happen by June end and probably in July. If the data supports them on the economic side, they would go for a hike because the data has been very patchy for the last four-five months. So whenever Fed thought that the economy is picking up, a couple of payroll data or economic data had disappointed them and they have taken a seatback. So markets are clearly confused and they feel that maybe one or two more hikes are discounted in the price but not more than that in the calendar year. That is why you are seeing such a muted reaction even after Fed’s comment on Friday last week.

ET Now: The other concern for financial markets at least in the first half of 2016 was that what will happen to the Chinese currency and today as we speak, the Chinese currency is sitting almost at a fresh low for the year. Last time when the Chinese were devaluating, there was chaos and there was havoc in the market. Now there is a natural devaluation in the Chinese currency. It is just that markets have decided to ignore that. So my question to you is that concerns which plagued us, which haunted us, which bothered us, which added to volatility in the months of Feb and March, those concerns have evaporated again and markets have decided to ignore them.

Pankaj Tibrewal: Absolutely. I completely agree with you. The global markets have been too calm for too long and that means someday something may come up suddenly. We are not so worried about the Fed hiking once or twice in this calendar year but what we are more worried about is the Chinese action and the Chinese policy action and clearly out of that, the Chinese currency devaluation plays a very important role and I think if an abrupt 8-10 per cent devaluation happens on any single day, markets will suddenly wake up and say that this was not what we were not expecting and clearly you could see a knee-jerk reaction to the global financial markets. So that is a point of worry. However, markets have been too calm. So that is a point of concern. We need all to be aware of near term market direction perspective.