The pace of recovery in the Indian economy from the twin shock of demonetisation and implementation of GST has been quite encouraging. Quite a few high frequency data-points like air traffic, consumption of diesel, auto sales, consumer product sales and job listing on recruitment websites suggest fairly optimistic economic growth outlook, said Gaurav Dua, head of research, Sharekhan, in an interview with Rajiv Ranjan Prasad. We expect GDP growth of around 7.4-7.5 per cent for FY19 and the low probability of fiscal slippages, he added. Excerpts:
While global and Indian markets are at all-time highs on the 10th anniversary of the financial crisis, some analysts are saying the global capital market is facing serious risk aversion. What’s your opinion?
Markets across the globe (especially the US markets) have seen one of the longest bull-run in the past decade. Initially, the rally was supported by easy money and recovery from a low base. But in the past few years, the rally has been supported by synchronised recovery in economy in major regions, along with a dream-run in the tech stocks (FAANG) listed in the US markets.
But the situation is changing. With divergent monetary policies where the US is unwinding the low interest rate regime but other major regions are still persisting with highly accommodative monetary policy. This is creating uncertainty in the financial markets globally. The tariff barriers put up by the US against China and other countries and rising energy prices are adding to the volatility in financial markets. Given the growing volatility-led currency fluctuations and premium equity valuations globally, the scenario is turning unfavourable for the equity investors.
Rupee’s decline and crude oil price hike are coming like a double whammy for the Indian economy. Do you see the equity market pricing it in later as the bond market is already reacting with yields rising?
Rising energy prices does impact domestic macro variables adversely in terms of hardening of yields and pressure on the rupee. But given the composition of benchmark indices Nifty/Sensex, the earnings outlook does not get impacted materially though it limits the valuation multiples (PE ratio).
Our base case assumption is that the upside is limited from here in benchmark indices. Moreover, investors need to rejig their portfolio adding exposure to export-driven business and other sectors that benefit from rupee depreciation.
What’s your long-term view on the US-China trade war?
The US dollar is strengthening against all major currencies. The positive economic data in the US and unwinding of accommodative monetary policy by the Federal Reserve are lending strength to the dollar. The rupee depreciation is part of the global contagion. Given the trend, it is advisable to rejig the portfolio according to emerging macro conditions.
India didn’t seem to be getting impacted so much till recently. But it’s changing. Do you see matters escalating as US elections draws near?
Pressure to curtail import of oil from Iran is quite detrimental for India. We hope that the government would be able to mitigate some risk through diplomatic negotiations with the US government.
How do you see domestic economy doing with GST collections not improving much month-to-month, monsoon near normal except in East and North East and petrol and diesel prices at all time high?
The pace of recovery in the Indian economy from the twin shock of demonetisation and implementation of the goods and services tax (GST) has been quite encouraging. Quite a few high frequency data-points like air traffic, consumption of diesel, auto sales, consumer product sales and job listing on recruitment websites suggest fairly optimistic economic growth outlook. The same will eventually reflect in GST tax collections. We expect the gross domestic product (GDP) growth of around 7.4-7.5 per cent for FY19 and the low probability of fiscal slippages.
Mutual fund inflows in equity mutual funds moderated further in August/ Do you see it as a sign of investors maturity and risk aversion when the equity market is at all-time high or other attractive asset classes like fixed income, real estate wooing smart money?
Retail investors have primarily invested in equity funds through the systematic investment plan (SIP) in the past few years. This reflects the growing awareness and maturity of investors. Moreover, the trend of shift of household savings into financial assets (including fair share into equities) is likely to continue with inflation under control and real interest rates fairly high at current levels also. More importantly, the outlook for physical assets (real estate and gold) continues to remain weak. Thus, we expect fair share of inflows into equities though the market sentiments could result in aberration occasionally.
The government is aiming to meet its disinvestment target by December. Do you see enough demand for PSU shares among fund houses and insurance companies as foreign investors are cautious while investing in India so far this year?
Disinvestment in well-managed public sector units can be absorbed by the equity market especially since the pipeline initial public offers is also limited now. But the ability to meet the set disinvestment target could be an uphill task if the global uncertainty-led volatility persists in the financial markets globally.
What is your take on equity market performance in H2FY19, which is dotted with political events like assembly elections in five states and general elections by March-April 2019?
Our base case prognosis is a range-bound benchmark index with improvement in sentiments in the broader markets as earnings growth picks up in the coming quarters.