sortiwa
[ad_1]
We are going to get the GDP Q2 number this week and many are predicting it to be below 5%, but the markets are hitting new highs! Are markets divorced from reality?
The Sensex or stocks which are hitting high midcaps are still 15% down from all-time high and smallcaps are about 30% down from all time high. The contradiction of economy is reflected in the market in terms of divergence between largecaps and smallcaps.
Second, the market is forward looking. Certain steps have been taken by the government and the regulator to support growth. Interest rates are being cut, banking liquidity is now positive, transmission of credit is slowly but steadily improving. Oil has been relatively subdued and monsoon has been robust. Put all these things together, the market is factoring in that December 2019 growth will be better than September 2019 quarter and March 2020 quarter will be better than December 2019 quarter. This whole movement to a partial extent is supported by the fund flow. Suddenly FPIs have turned buyers and they have brought in reasonable amount of money in a relatively quick period of time. Supply has not emerged. A small IPO closed yesterday but we have not seen large scale supply emerging. A confluence of factors have come together which, with hope for the future fund flow has resulted in Sensex reaching all-time high. Meanwhile, the midcap and smallcap stocks are far from highs.
Markets are hoping things will get better but is that based on any factual information or data? A recent report claims that consumer confidence and consumer spending have plunged to all-time lows; unemployment is an issue. What is the silver lining that the market is seeing and the rest of us cannot?
So let me recount some of the silver linings. This is not to deny all the negative headlines, but this is just to put in perspective what is good in the economy. One. while FMCG companies have been talking about subdued demand, at the same time last year, Khadi and Village Industries Commission grew its turnover by 25% or Rs 16,000 crore. It is not a listed company and so it does not publish quarterly numbers. But they managed to create Rs 16,000 crore growth in FMCG items. The name does include khadi, but only 5% of sales is khadi products. Rest are all consumer FMCG products.
For the year ending March 2019, their turnover was Rs 75,000 crore, which is twice the turnover of the largest listed FMCG company. Now you and I do not go and shop in KVIC. Obviously, it is Bharat, rural India with bottom of the pyramid people going and shopping at KVIC.
On one side we heard Rs 5 biscuits are not being sold as fast as expected but smartphone sales are still growing in double digit! On one side, the automobile sector is going through tough time but then products like Seltos from Kia, Hector from MG Rover have waiting periods. So, there are many contradictions in the economy today that is probably confusing the market.
But more importantly, the market is hoping that all the action taken by the government and regulator for helping the economy recover will slowly and steadily start coming into play. We had the tight monetary policy to control inflation but now with better liquidity and banking system and lower interest rates, hopefully credit growth will pick up which in turn will support growth. Oil prices and monsoon have been positive for the economy. The corporate tax rate cut should help investors bring their manufacturing plants to India. It is the confluence of events apart from funds flow, which together has pushed the market to this level.
Recently you have been inducted as a Member of the Prime Minister’s Economic Advisory Council. Does it give you a sense of where the government is headed in terms of the reforms process?
The chairman of PMEAC will be the right person to answer that question. I can only answer this question as Managing Director of Kotak Mutual Fund. Clearly, we have seen the government’s intent of carrying forward the reform process. Earlier, we saw large NPAs being created because banks were lending money not purely on merit of the borrowers. Those scenarios are behind us. Of course, we have to clear past NPAs, but hopefully going forward future NPAs will be lower.
Earlier, there was no consumer protection in real estate sector. With the introduction of RERA, consumer protection has come to foray. It is obviously hurting small developers but eventually we will create globally competitive real estate industry as big names like Tata, Godrej, Birla are entering into real estate development sector.
Lower inflation and lower fiscal deficit will eventually reflect into better macro and that will help our currency as well as interest rates.-Nilesh Shah
Earlier our inflation was running into double digits, today it is running into lower single digit on a core basis. That has been achieved with lots of effort from RBI. The benefit of lower inflation will eventually play out on our interest rates. We earlier had fiscal deficit running into almost higher single digit. Now, they are hovering around middle single digit. It is still high compared to global standard but lower compared to our peak.
Lower inflation and lower fiscal deficit will eventually reflect into better macro and that will help our currency as well as interest rates. So these are all fundamental changes which are happening and they will all reflect in stabilising growth and sustaining growth over a period of time. Reform is a journey it is not a destination at every point of time we will have to keep on reinventing ourselves.
In this journey of reforms and with this kind of optimism shown by the markets, what are the areas where you hope to see a rebound soonest?
One sector where we have seen good players delivering sustainable growth is financial services — across the range of private sector banks, non-banking financial services companies, microfinance institutes, allied financial services like insurance and mutual fund and public sector banks. You have a choice of companies, a choice of portfolio which will show growth as well as sustainability.
The second sector where we are bullish is related to chemicals, especially specialty chemicals. This is one space where India could be in a long-term growth trajectory just like technology was in Y2K days. We believe there is a huge growth opportunity for Indian companies which are focussed in speciality chemicals and export markets. While chemical cycle will continue to have cyclicality, this is long-term sustainable growth from the Indian point of view.
The real estate sector is moving towards corporatisation of real estate sector or formalisation of real estate sector; weaker players are moving out, bigger players are entering. Clearly there could be a revival of real estate over the next couple of years. This sector can be played through real estate, building material, consumer durable and housing finance companies. Since governance is a bigger issue in the real estate sector, it is far better to play this sector via allied sector rather than the sector itself.
On the other hand small and midcap stocks are today at a significant discount to their historical valuation as well as to their all time highs despite passage of almost one and a half year. Diversified portfolio of well-run small and midcap stocks gives you valuation comfort. We believe this is the time to be cautious on valuation. What is looking very safe from a business growth point of view is expensive; what is not looking very safe from a business growth point of view is cheap. You have to balance your portfolio in a manner where valuations are below the market valuation and the earnings growth of that portfolio is higher than market earnings growth.
[ad_2]
Source link
