sortiwa
[ad_1]
We are now counting down to the Budget; we are discussing whether or not there will be an early revival of the economy. What is your sense from what you are seeing? Do you feel we are on the verge of an economic recovery?
I am in limbo now, because I had expected the recovery to start building up a few months ago. The exact opposite happened; the economy seems to have had the carpet yanked out from under its feet. And I do not understand why. Looks like lack of capital formation is the principle driver.
With the Budget, the constraint is obviously the 3.3 per cent cap of deficit as a percentage of GDP, and the fact that taxes were cut last year. So, on the surface, I am not sure how much wriggle room they have, but if somehow they can pull a rabbit out of the hat, then I think it would make the infrastructure sector look interesting. So I am just waiting to see what they are going to say. I do not want to try to pre-empt them.
In the light of that, where do you see the opportunity? If you were to look for an opportunity on the back of any such stimulus, would it be infrastructure, or would you look to select stocks based on valuations?
With the Budget, infrastructure would absolutely be the first protocol. But broadly on the market, Nifty and Sensex do not really represent what is going on, because only about 10 to 15 stocks are driving those benchmarks higher, and the broader market has not done nearly as well. So, one can make a case for the broader market, particularly the midcaps, which have lagged over the last two years. They typically have much higher growth rates than the mega-caps. So we continue to like midcaps. Their valuations are low and they have above-average growth, and therefore, that is one place at least that we like.
What is the view of the global fraternity on the Union Budget? Are they going to be watching the fiscal deficit number with a hawk eye? If it is sacrificed to try and instill growth back in the economy, would it be okay? If so, how much of a miss would be okay for FIIs?
I think the Street will tolerate allowing the deficit to rise. India is a very large country in size, population and its economy, and it is understandable that at this pace of development, the country needs to run a current account and fiscal deficit. As long as it does not blow out to 6 per cent or something, the foreign community would be accepting of it. But if you ask me whether that actually translates into a broader economic recovery, I would say no.
What is really missing, as I said earlier, is capital formation and the base of that is the financial sector, which continues to be inadequately capitalized. So government stimulus can help at the margin, but to really put the economy where it needs to be, the financial system has to be recapitalised and that is a long and painful process, one that would clearly not happen tomorrow.
As an outsider when you allocate capital, somehow the Indian market has not given desirable returns to investors despite the underlying promise of demographics, both in absolute terms and also in dollar terms. So when your clients ask you if you have gone wrong on your India Call, should we increase allocation, should we pull out, how do you defend your bullish view on India.
To say that we are bullish on India may be a bit of an exaggeration. We have been that way for about a year-and-a-half now, and we expect the whole emerging asset class to do well over the next 10 years. I am not saying it is going to happen tomorrow, but I do think every decade is different. The last 10 years, we all know, belonged to the US. My conviction is that emerging markets will have a big part in the bullish performance of the next 10 years; whether India is going to be included in that or not, I do not know. I think it is very much going to be China, that is what my perception is. Because China has the technology, and what people really want in their portfolios now is technology or consumer type companies that are kind of a play on technology like e-commerce or fintech or all that kind of stuff. The unfortunate thing about emerging markets is that they do not have enough.
Emerging markets are old-fashioned markets in their sectoral composition. A few good technology stocks or consumer stocks which do make that kind of criteria that I talked about, but they are trading at either extremely high valuations or are not even listed in their home markets. Most of them are listed in New York.
To say that we are bullish on India may be a bit of an exaggeration. We have been that way for about a year-and-a-half now, and we expect the whole emerging asset class to do well over the next 10 years.-Mark Mathews
So, the long, winding answer to your question is, people are still willing to give India the benefit of the doubt, because the demographics are on its side, but it is just not the fashionable place to be in right now. In the good old-fashioned emerging markets story, people are more interested in new sector type stuff which these markets do not have enough of.
Well, then how do you think things are shaping up and how are we placed in contrast to that?
I think favourably for the markets because of all the rate cuts last year. Over 50 central banks cut interest rates last year. The European Central Bank and the US Federal Reserve started quantitative easing again. So there is an abundance of liquidity, which is by far the largest reason why equity markets, including India’s, have been strong. If you think about it, in 2018 markets went down because central banks were raising rates, and last year they cut rates. Probably the rate cut cycle is done. So rates are on hold, but they are on hold at extremely low levels and at the same time, the ECB and the Fed are doing quantitative easing. So their markets are fine. The interest will remain very biased towards China, because of its very large and growing technology sector, which other emerging markets do not have. But the big thing that will help all emerging markets, including India, would be if the dollar turns down. There are a few reasons why it should. Then, this year could be quite good for Emerging Markets.
If you have to, let’s say, identify the high growth sector of this decade, where would you place your bets in?
If I just had to choose one, it would be lifesciences. In other words, the biotechnology component of technology. But the amazing progress that is being made, particularly in aspects of genomics and the study of the gene and the manipulation of DNA, that will create a seismic shift in the healthcare industry and in pharmaceuticals over the next 10 years. There will be fantastic price performance. A lot of that is in the US, a lot of it also is in China.
You have talked about midcaps in India. But if you still have to go with a theme, what would you be looking at when we see that recovery?
Private banks are expensive, but I do think they are beneficiaries of the PSU banks continuing to struggle with their barely adequate capitalisation and the NBFCs clearly in the dog house with the defaults and delinquencies that happened over the past few months. So, private banks are really in a great position to pick and choose which loans they want to give and the terms of those loans. They are expensive, but you just saw Axis Bank. So something like that would be well placed to benefit from that environment I just described.
Again I am putting you in a spot here: it is a nightmarish question if somebody asks you to predict anything beyond three years. But if a client says Mark just one trade and let us go on a five-year holiday, how would you do that?
Globally or within India?
Wherever you want. We are talking about five years.
Absolutely, it would be Shanghai. Shanghai stock market is not similar to India’s. It is heavy in banks and communications, and that is why it has not been a good market in last 10 years. Shanghai will be a great market over next five years, because the technology sector there is growing quickly. A lot of new and interesting high-growth companies are coming into the market with good business models and it has an enormous population — same size as India but with higher spending power. Better combination network through 5G and they have also got something called social credit system, which is where each individual citizen and corporate entity will be assigned a grade depending on how good or bad they are and well, will help. That might sound invasive, but it will make their economy much better run, because it will reduce the level of graft and corruption and make people better citizens. So my pick would be Shanghai.
[ad_2]
Source link
