- Markets were due for a bit of correction and that is happening.
- Budget being fiscally prudent, will be a drag on the economy.
- Job creation will prove more robust over the next 12 months.
A day after a heavy selloff, there is post-budget nervousness, particularly about how the surcharge on the super rich may impact FPIs and flows into India. What is your takeaway?
There are a couple of factors to look at here for the markets. We have got a global issue which is expectations around Fed cuts. We are impacted by the US employment data which was very strong; the best we have been so far in 2019. So, global markets are coming off. The budget was fiscally prudent for a government that has just won a strong mandate. The budget had little in it that would provide a short-term boost to earnings and to the market. As you look through the details — decreasing the maximum holding promoters can have in stocks, some of the taxation issues — then the interpretation is that there is a degree of an overhang/inability for the wealthy to invest in India in a tax-efficient way. We have had a good rally in markets, whether it be global markets or the Indian market, and we are having a degree of sell on news. I would not overplay some of these factors that came out of the budget. There are relatively modest near-term impacts rather than something that impacts the medium-term story for India; which in my view was helped by the budget because it was fiscally prudent.
There is a sense of a consumption slowdown as we head into earnings. The budget provided stimulus on the monetary side which may not be transmitted and may also take a while. And, we are still waiting on the expected rate cuts. Do you feel that this is going to be enough to really get things going again or do you see a prolonged period of pain on the back of this slowdown?
Well, the budget in trying to be fiscally prudent will be a drag on the economy. Now you got the Reserve Bank offsetting that, if they continue to ease. This is a sensible way of dealing with the challenges within the Indian economy. The problem for the market is that there is no incremental good news coming out of the budget. We have had a good rally in Indian equities, predominately driven by the election result which was much better than the market was expecting. That was combined with a rally in US equities which was driven by good economic data, as well as a much more dovish Fed. Perhaps, now we have gotten past that optimum point in the market where good economic data is interpreted as a less accommodative Fed.
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We have passed the sweet spot. Markets are probably due for a bit of correction and that is occurring at this point. Now, with regards to the Indian economy, consumption and business investment, I do not see any near-term positive drivers for consumption. The Indian consumer is not overly sensitive to interest rates. There are other factors that can be more dominant within the Indian economy. Some of the things that came out of the budget may increase the propensity of countries and global organisations to invest in factories and other services in India. In the longer term that might help consumption.
What do you make of some stocks like Bajaj, Titan, etc? What will happen when these stocks start to correct?
You are referring to Bajaj Finance which has been an outstanding performer year to date. Investors are looking for excuses to make some profits and you will see corrections in the stocks that have had the biggest movements. This is a normal event in capital markets. It is nothing to get overly excited by. There is probably further downside risk for these stocks as investors reduce positions. But I do not know if this tells us that there is a profound change in the case for investment in these stocks. I do not think there is. It is merely a correction in these markets.
How are you viewing the financials given the rescue package that was announced for NBFCs? Do you feel that it will ease some stress in the system? Are you happy that they actually addressed it or do you feel it was just covering up for the mess that has already been made for the lower quality names?
We have got a NBFC issue. We have also got a PSU bank recapitalisation issue. Analysts are interpreting it as good news in more capital being provided, but the capital also seeming to be more of a minimum requirement than a sum of money that resolves the issue for the long term. We will continue to be discussing issues with NBFCs and undercapitalised PSU banks. Now that we have had some change in regulations, particularly for housing finance companies, the market will probably treat that as a positive thing as the regulation may get more robust and homogeneous across the different types of institutions. That is probably a good long-term fundamental new story for India.
Speaking about overall consumption, reports indicate that the overall rural slowdown is also likely to lead to a massive deceleration, and that recovery is going to take time. How long will the overall consumption slowdown take to recover?
To change the consumption slowdown, you need to boost rural incomes. You need to do things to improve urban real incomes. What could happen here is that crop could be better than expected if the monsoon is better than expected. At the moment, the news flow about the monsoon is more on the negative side. There is no indication out of the budget that you are going to see an increase in minimum support prices or in subsidies into rural India. So, it looks like we are going to be weather dependent there. I think for urban India it is whether we get more political certainty. We have had a prudent budget with some positive measures to make FDI easier into India. But perhaps the job creation will prove more robust over the next 12 months and actually boost incomes of the household sector which allows consumption to recover.
As an equity investor, the whole consumption story is very frustrating at a market cap level. Remember a huge amount of the consumer discretionary index is the auto names. With the move to electric vehicles you got a really nasty gap in the demand for automobiles for the next couple of years. What is happening globally is that individuals that own cars are keeping them for longer as they are waiting for new technology to hit the right price point, which would then generate a replacement cycle throughout capital markets. Whether it is Germany, United States, United Kingdom, or Japan. the auto sector is under extreme pressure and that is a big way that you play the consumer discretionary theme. Also, the autos will drive consumer financing. Auto financing is a big part of the finance industry beyond mortgages. I think the consumption story as you play it in capital markets is going to be quite frustrating because much of the market cap has been hit by this secular-technology story, as opposed to a cyclical up-and-down consumption.
I want to get your perspective on the sentiment in the market right now. If you look at a stock like Titan, it is down about 10% at this point of time. Are most people just finding a reason to sell large cap counters where they have made money?
Well, let us be careful about how we comment on these things. We are talking about a market that has done very year to date. We have had a correction on Monday and that correction is continuing today. So, before we decide that this is a medium-term trend, let us be conscious about the time frame we are talking about. We do have concerns around consumption, but it sounds to me like the Titan story is a very specific one. The stock has preformed well and expectations were about what the company can deliver. Their announcement is being treated quite sensibly as a reason to reduce your position in the stock.
Do you see more flows coming in? What is your outlook when it comes to the debt side?
The near-term outlook for flows is going to be quite poor. We are seeing a correction in global equities, and also a strong performance. We have had a rapid decline in bond yields for much of the year where you ended up with the funny shape in the yield curve. As the investment community pays more attention to the US economic data — which remains very advanced and undoubtedly — some of the most important you should ever look at in a consumption driven economy — the outlook on higher bond yields may be a more normalised. If that is the case, then you are going to get some broader pressure on the credit markets, including emerging markets. I would be cautious on flows as we move through the summer months. It could be a very normal seasonal pattern where you get the rally being powerful in the first half of the year, then a correction during the summer months, and then as people start to think about the following calendar year(September-October), you begin to get some recovery in markets. So, do be cautious about expecting international capital flows to underpin markets. I do not think that is going to be the trend.
I want to touch upon the fresh offering that we are going to see post the change in public shareholding norms that have been announced. Do you feel that the market has the appetite, not just for the some of the higher quality names like TCS, Wipro, etc, but also for the PSUs that are going to be changing that shareholding?
The market has the appetite for this issuance, definitely for high-quality names. Investors would welcome a higher free float as it would increase India's rating in the MSCI indices, which is obviously helpful in a world where there is a lot of passive products. With regards to the PSUs, it depends on the businesses. Investors are very concerned about corporate governance and would like to see independent boards that are protecting the interests of the minority investor as opposed to representing government departments.
If the change in norms which results in the government hoping to raise more money through disinvestments makes them begin to understand the importance of properly restructuring PSUs, then that could be very positive for India. Unfortunately, India had the habit of allowing its public sector units to wither away, be it BSNL, MTNL, Air India, or banks. Now is the time when the government has such a strong mandate to really put through some major reforms for public sector units and make them proper private sector entities; maybe still with a big public sector passive investment. That would be the best thing for the Indian economy. It would also be the best thing for the employees of those companies. It would be much better to be in a robust well-managed entity, rather than a PSU which continues to lose market share. So, I think it is a great question and it really depends on what we are being sold. And if we are being sold a good restructuring story where there is proper reform, then I think there will be plenty of appetite. If we are being sold a minority stake in a PSU where the chairman changes every three years with no long-term strategy, then I think investors will be very cynical.
What is your take on autos? Do you continue to remain underweight in your outlook on the banking space as a whole?
Structurally underweight autos globally, whether they are manufacturers, a part of the supply chain, or distributors. It has to do with the transition to electric vehicles. If you recall back to when we used to have televisions which were big bulky things with cathode-ray tubes in the living rooms, we recognised that plasma TVs and TFT TVs were the new way to go. But they were far too expensive. So, what we kept our TV until eventually we could afford the flat panel TV to watch cricket on. That is happening in the auto sector. People recognise that electric vehicles are the new technology, but they do not want to commit substantial capital to replacing their vehicles. That results in this demand gap. The auto sector is structurally underweight. It may have some short-term rallies, but against this very difficult structural background and frustration in trying to get consumer exposure when such a big part of the consumer discretionary index is structurally challenged, it is a big issue for equity investors.
With regard to banks, you know you have got the classic rally in India. That is a rally of high quality names, big distribution, and performance this year. So, the private sector high-quality banks have performed extremely well. We are perhaps seeing a correction based on the budget announcement of 70000 crores going into PSU banks. But I view that as a more tactical story. You are still better off staying with these high quality and high ROE private sector banks, rather than move into the PSU banks even with modest recapitalisation. So the broad story here is that the market has done well, we are getting a correction, and you are going to see a correction that will be more dramatic in the stocks that have done well. Look at the fundamentals of those and they are probably going to give an opportunity — maybe a month or so from now — to add back to these high quality names.
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Budget was fiscally prudent and will help medium-term India story: Adrian Mowat have 2581 words, post on economictimes.indiatimes.com at July 9, 2019. This is cached page on Travel News. If you want remove this page, please contact us.