It is better to stay on the sidelines and not make investments right now: Sunil Subramaniam, Sundaram Mutual
Global investors do not want to commit money into emerging markets, says Sundaram MF CEO
The market is dealing with uncertainty at this point of time. Election result is just about nine days from now. What can be the prudent way of dealing with so much volatility, so much uncertainty and, even the global cues that are adding further pressure?
For a short-term view, it is better to stay on the sidelines and not make investments right now. In terms of the fact that since there is no clear guidance yet from an election outcome, while the market is expecting BJP to come back with a lower majority, there is no certainty about that too. It could go either way.
So I would say that in the short term, the domestic fund managers are buying a little bit because the FIIs are selling. It is not a very clear-cut directional buy yet from them. I would say that internationally, the uncertainty looks likely to last for a longer time because the trading of barbs on the trade side between the US and the China. We do not expect that to come to a halt soon.
From Trump’s perspective, at the end of next year, there are primaries for the election and hence the political rhetoric and Make America Great Again and the need to appear strong in the face-off with China will continue. Hence, there is a clear signal from global investors in terms of risk-off versus risk-on. I do not think at this point, they want to commit money into emerging markets. So, all the emerging markets are seeing outflows, including us.
I would not say that the India outflow is related to the election outcome, but it is more related to a global uncertainty on the trade front, especially with China. That will likely to continue for some more time. I do expect that choppiness from FIIs’ perspective to continue for some more time, even post the election results.
What is happening with respect to the entire consumption space? There is the NBFC crisis, the ghosts of which still continue to haunt us. There is very weak consumer sentiment. The macros are not looking too good. Which are the pockets within the consumption space that one needs to be wary of at this point of time?
There are two things to be cautious of. The first is on the durable side. Those durables which are heavily dependent on financing, because NBFCs are still absent from the lending side of the market. Even those good quality NBFCs, which are able to raise money are using that to manage repayments. I do not think there is a fresh lending happening. It will take a little bit of time for the retail banks to step in to fill that gap.
The consumer durable segment which is heavily dependent on financing is definitely going to face more challenges because of inventory buildup.
Second, there has been some amount of sentiment because of the emission norms and the changing over from the old diesel vehicles with converters and all that. Definitely, consumer durables and auto are going to face challenge in the short term.
The other space to be a little bit cautious is on the rural side because while as a country, as a stock market and as a financial market we all celebrate low inflation because it is supportive of RBI rate cut, remember that a low inflation is actually hurting rural incomes because if the crop prices are not going up, their income is impacted. That is why in case of rural-oriented FMCGs, the earnings are down and the forecast is also down.
These are the two segments where one ought to adapt a wait and watch stance. A little bit of healthy inflation would not be a bad thing from rural consumption perspective. Thus for the next quarter, quarter and a half till the onset of the festival season, it is still wait and watch on these two specific spaces.
There has been a bit of development with respect to how the rupee has been moving as well. It was the second worst performer within the EM basket in the last five days. It has come off definitely from its 10-week low, but going forward, how is it likely to play out and what will be the impact on IT as well as pharma?
We do not see the rupee weakening too much further because the weakening was more related to apprehension of crude going up. Whereas with the US recession and with the trade war, the dollar is definitely going to be on a weaker wicket over slightly medium term, three to six months. So there would not be pressure on the rupee, so that is one.
Where the rupee can weaken is if the electoral result is not up to expectation of a continuation of this government, then the hot money from FIIs could pull out. That could lead to a slight pressure on the rupee. But apart from these two factors, that is, risk factor and the election risk factor, rupee otherwise does not have any other pressure.
In the context of IT and pharma, given that there is this is a trade war, given that there is a recessionary impulse in Europe and a slowdown in the US, we do not expect their order book or their business to really boom. A strengthening rupee is not good from a currency perspective. So, currently we are underweight both IT and pharma.