Double-digit GDP by March could be a challenge
Interview: Saravana Kumar, CIO, LIC Mutual

The trade war that has erupted across the globe is not sustainable and thus the negative impact on the global equity markets are not going to be there for long, said Saravana Kumar, CIO of LIC Mutual, in an interview with Sangeetha G. In case of India, the trade war measures would make negative impact not only on New Delhi but Washington as well in the medium to long term, he added. Excerpts:

How do you evaluate the stock market movement in India in the past couple of weeks and the factors that influenced the market?

The US FOMC had raised the reference Fed rate a couple of times in the last one year. The US 10-year treasury is trading close to 3 per cent, which is higher than the last decade. Since the US is AAA rated sovereign, and on a risk-adjusted basis, the global investor’s return would be better. That’s the reason that foreign portfolio investors (FPI) pulled out $5.6 billion (Rs 38,000 crore) and $1.1 billion (Rs 7,500 crore) in debt and equity assets in 2018. Second, India imports more than 80 per cent of its oil requirement, and Brent crude that was trading at $45 per barrel one year back is trading at $75 per barrel. This means an increase in crude makes a negative impact on our retail inflation. Third, some of the mid- and small-cap stocks valuations are not meeting their earnings. That is the reason the BSE small-cap index and the BSE mid-cap index had corrected by minus 13 per cent and minus 10.5 per cent, respectively, in the last 6 months.

Fears of aggravating trade war were seen affecting the global equity market last week. How would things pan out in the coming weeks?

The trade war has made an impact on the global equity market. At the same time, the US would know very well that its economy also depends on exports to other countries. If you analyse the US multi-national companies that figure in the Fortune 500 list’s top line is linked to the US exports to other countries. Hence, I can say the trade war is not sustainable going forward. The negative impact on global equity markets due to the trade war is not going to be long lived.

India too has started imposing tariffs on the US. How will these measures affect our trade with that country?

This ongoing trade war could impact the export-import relations of India with the US for a short term. India has started imposing tariff restrictions due to the US action but what remains unchanged is that India imports not only Boeing aircrafts from the US but also happens to inhabit major users of Apple Inc, Microsoft, etc. It is a given that the US faces challenges in export-import as well with other emerging countries like India and China. The trade war measures make negative impact on not only on India but on the US as well, in the medium to long term.

Which are the sectors investors should stay away from at this point of time?

First, due to rise in retail inflation, the Reserve Bank of India (RBI) is increasing the repo rate as a result of which the interest rate in the system has started hardening. It makes an impact on NBFCs that are depending on wholesale borrowing. So an NBFC that is sensitive to borrowing rates needs to be given less weightage. Second, selective pockets of the capital goods sector and infrastructure may see some earnings pressure. Small-cap cement space also may see weaker earnings due to excess supply. Due to competition from Jio, earnings of listed telecom space may see further pressure for the next 8 quarters. We need to be cautious on listed telecom stocks. Due to stress portfolio, we may not see earnings upgrade in mid and small PSU bank space for the next 4 quarters. Increase in crude oil makes impact on oil marketing companies in India.

Are we headed to another global recession, given the rising bond yields and crashing equity markets?

The US 10-year treasury is trading closer to 3 per cent, which is higher than the last decade. Global funds mean higher allocation to the US treasuries and the US-based fixed income assets. It makes an impact not only on the US equity, but also on asset allocation to other emerging markets that may come down. Raising US bond yield may not lead into global recession. In the last 12 months, we have seen the rise in crude, metals and industrial commodities. A rise in commodities would benefit the West Asia, Russia and other CIS countries and continents like South America, Australia and Africa. At the same time service-linked economies like India may not see recession, subject to our industrial recovery started picking up.

The government leaders have been talking about achieving double-digit GDP growth. Is it possible to achieve this by the March quarter?

In the last four years, since the present NDA government has been in power, we had witnessed recovery in the economy. Infrastructure, rural, housing and urban development has recovered. At the same time, the capital investment from private sectors is lagging. Most private sector industrial space is operating at around 65-70 per cent capacity utilisation. So achieving double-digit GDP by March 2019 could be somewhat of a challenge.

Now that the June quarter is over, what are your expectations on corporate earnings?

In the June quarterly earnings, the selective sectors may meet investor’s expectation. Retail banking space, selective auto OEMS, auto ancillaries, fast-moving consumer goods (FMCG) and information technology would ideally be able to meet investors’ expectation. The monsoon season is expected to be a generous. It would benefit the rural-linked sectors. It could include agri input; automotive; farming vehicles and consumer sectors. Selective stocks in sectors like infrastructure, capital goods, mid- and small-size cement stocks; oil marketing companies and telecom may disappoint investors.

Sangeetha G.