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Forget macro downers, liquidity surge taking markets higher: Sunil Subramaniam

ET Now|
Nov 20, 2019, 03.28 PM IST
Sunil Subramaniam-Sundaram MF-1200


  • People buy 3 years down the road; nobody is making investments for 3 months
  • My GDP view is it will take 18 months for economy to recover.
  • HDFC Bank is going to be the next trillion dollar company.

Yes there is a slowdown, yes there is a chance that short term, GDP growth could go below 5% but that should not be driving your investment decisions. Ultimately what are you betting on? You are betting on the fact that there is a huge liquidity surge, says Sunil Subramaniam, MD & CEO, Sundaram Mutual Fund. Excerpts from an interview with ETNOW.

The markets are sitting at an all-time high. Are markets ignoring all the land ills? We thought the slowdown was behind us but fresh landmines have been discovered?
Yes but one thing you have to remember is that the markets had corrected a big, big time. What you are seeing now is just a setting right of that. The market is saying that GDP is going to bounce back. The market is seeing green shoots and they have overcorrected in the run-up, because India from 7%-8% economy is suddenly coming to around 6-5%. Everybody overcorrected and the market and the Budget did not help in terms of taxation. The market is just resetting that. It is just a reversion to mean.

If you look at forward PEs today I would not say they are overvalued, rather they are at decent levels. FY21 largecaps are around sixteenish and mid and smallcaps are at thirteenish. Definitely the market is not in a euphoric or overbought territory. So, 1) oversold is getting corrected one. 2) There are green shoots seen across the board, while there may not be a sure bounce back yet. Private vehicle registration numbers are up 11% year on year in October.

You are always so optimistic. I cannot help but wonder because it is brief and it is like a blip, it is not a sustained trend that we are seeing in auto. Why do you have such conviction because sometimes the numbers are not adding up?
Yes, see what happens is there are two types of analysts; one who studies the market and one who actually invests. When you are analysing something and trying to project right, hard facts are always shown. When you are investing, you have to take a call on two things. One is that nobody ever caught a bottom right and, nobody ever sold off at the top. Second is the fact is that market is trading information. When hundreds and thousands of analysts are studying it and each gets a glimpse of the future, everybody is buying three year down the road because nobody is making investments for three months.

Now let us say that you are assuming GDP growth may go below 5%. SBI economists are saying so. What all it means is that for the near term, may be there is going to be a correction. He does not mean that fundamentally India is resetting to 4% GDP economy. Yes there is a slowdown, yes there is a chance that short term, GDP growth could go below 5% but that should not be driving your investment decisions. Ultimately what are you betting on? You are betting on the fact that there is a huge liquidity surge.

Today 65% of advance country debt is in negative yielding territory. There is the liquidity effect. The US Fed is pumping in $60 billion a month, ECB is pumping money. When you have the surge of liquidity and you cannot go into debt and there is a limit to how much gold can take, equities is the natural destination.

The balance between growth versus valuations is always a play. In India, Rs 8,000 crore of SIPs are still coming in month on month. 3 lakh new customers are putting money into equities this month. The surge of liquidity is going to make sure that the market is waiting for a chance to look at some green shoots to crush in to buy. When a fund manager is investing, he is guessing what the other participants are doing and you cannot just stand in isolation.

My GDP view is it will take 18 months to recover. So, I will wait.

If markets are always right and forward looking, why do we have bear markets and bull markets?
The reason we have bear markets and bull markets is because of the Greater Fool Theory. When you buy, there is always the option that a greater fool is waiting there to buy it. That is why when the momentum goes up, it goes up and up and when it goes down, you lose confidence that there is a fool out there willing to buy what you sell. That is when the bear phase comes in. I would say it is essentially the fear and greed play, which is what the Greater Fool Theory is all about and that is why a person who has a long term view of an underlying economic trend right will always be the winner.

Domestic investors are still buying. We have got foreign cues, foreign flows intact but we are still waiting triggers from the government for some inflexion point. What if that does not come?
What trigger do you want from the government? Are you questioning the government’s sincerity towards economic reforms? I do not think you can say that. Yes, in the initial period they came to power, they were more politically oriented in terms of tough decisions. They are serious about it.

What The government is clear about is that they will not do any industry specific actions and they will not do any short-term revenue oriented consumption ticker events. Market would be very happy to see those happen -- direct income tax cut. LTCG cut. But look at it this way. A capital multiplier is something like four times the revenue multiplier and lasts four to five years longer. I am very supportive of the fact that the government is focussing only on the supply side, only on the capex spending side. But that is a slow longer process to bet on but it is better because that is what is more sustainable of a GDP revival is possible.

The fear and greed play is what the Greater Fool Theory is all about and that is why a person who has a long term view of an underlying economic trend, will always be the winner.

-Sunil Subramaniam

They could have easily increased NREGA by double, pumped money into rural India, would have flown into consumption, we would have seen a good ticker. They stayed away from that short-term populist decisions which would have easily given a bump up to everything and markets would have also been happy with that. But what they are doing are the right things. They are making India a more FDI inviting country. We have been consistently getting FDI growth. But the FDI is not the right kind of FDI, it is more coming into your digital startups, the Swiggys of the world.

What we need is manufacturing shift and the tax cut was one significant, ease of doing business improvement is another one. You need land reforms. You need labour reforms for which parliamentary majority will hope through. I feel that the government has got its brains and actions in the right point by not going after short-term pop-ups but to do fundamental things. What is the biggest reason for this? It is job statistics. Between 2017 and 2027, China is going to lose 21 million people from their workforce, India is adding is 117 million in that period. We are adding six times the number that China is going to lose.

But look at the other way, if the government does not deliver jobs for these 117 million people, we are going to have a civil war on our hands. So, there’s a knife against the neck of this government. That’s why all these tax cuts and FDI promotion because the only way jobs can get created is if world majors come and set up manufacturing shops in India. Today, Samsung is talking about moving production into India, Apple has already done a decisive move. About $755 million worth of business has already come from China manufacturing to India. It is a drop in the ocean because China has lost $45 billion, of which about 12-13 billion is permanent loss due to tariff, another 30-35 billion has gone to all the other counties in the world. We have got less than a billion.

China’s per capita income is $10,000, India is just $2000. If somebody has to screw the back of an iPhone on to the iPhone, if it is going to cost $50 per hour in China, it is going to cost $10 here. But everything is not hunky dory. These are all the building blocks which need to be implemented and the government is aware and they are doing all these long-term things to facilitate the thing. To me, all of these are the real reasons you should be buying equities.

Which one will be the next trillion dollar company in dollar terms of India?
One of the banks, probably HDFC Bank.

Not TCS, not Reliance?

TCS cannot be that, it is a services company.
Reliance is already there. Except in the US, if you take all of the markets, the top five banks account for 90% of the market share of those countries. In India, we are at 35%. The big banks are going to be get bigger, the government has also pushed for consolidation. A developing country needs financing and the bank which is really well capitalised is going to grab market share and that is...

You do not own HDFC Bank in your portfolio?
No, no, we do, we do.

Not like your core portfolio. You are bullish but you do not own it, right?
No, no, see that is because of the fund specific attribute. The reason I am saying is that one day a merger between HDFC and HDFC Bank cannot be ruled out, according to me. When I say that I am also looking at the fact that they want to be of global scale and raise money at global rates. Tday it can raise at negative yielding rates. They have got to get scale. It is already very big but just what a merger like that could achieve!

I mean I am just dreaming here but if you ask me, what has happened is sadly because of the way the NBFC crisis got handled and the way PSU banks are in a mess. Unfortunately, there is no competition for well run private sector banks in India today. I do not believe the transmission will happen. It will only be talk. Do you know why? It is because transmission can happen when too much money is chasing the borrowers. The point is as PSU banks merge, the big bank in the merger is going to clean up all the other banks’ balance sheets and take it out.

As for the NBFC crisis, the biggest financier of NBFCs was my own industry. We took all the liquid institutional money and gave it at short term. We are all wiser by the day now, we are not going to do that. The asset liability mismatch is going to be supported by this industry. So who is going to finance the three-year, five-year loan to a housing finance company? A few big ones again will get the money but then who is going to fill this lending space?

It is going to be the big private banks which are well capitalised, which have networks. There are quite a few in India but I am a believer that that is the big, big play which is a safe bet.

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