Current slowdown transient. Should be over by end of fiscal: S. Krishnakumar, Sundaram MF
"There will be some recovery in the second half of 2019-20 and most of this recovery will be driven by government action to revive growth."
The mid- and small-cap segments have been in bear mode for some time and largecaps are also in correction mode. How long will this weakness last?
I don’t think this weakness will continue for long because broader market valuations are back to comfortable levels. The gap between Nifty forward earnings yield and 10-year G-Sec yield has also fallen and is close to zero. Historically, the market has rewarded equity investors who entered the market when this gap is close to zero or below zero.
Foreign investors are still selling. Won’t this pull markets down further?
The short-term selling is due to some concerns over taxation. I think that will be settled soon.The Finance Minister is meeting industry experts and some actions may be withdrawn or modified. If that happens, it will be positive for market sentiments. Our long-term story—attractiveness of Indian market as a fast growing economy in the middle of slowing global weakness—will continue.
Therefore, foreign investors will be back soon. The government’s decision to increase foreign investor caps of individual companies to that of sectoral cap is another positive action. This will increase weight of several Indian stocks in global indices and India’s overall weight will also go up in the emerging market indices. This is an important factor most people have ignored. This readjustment in weight can attract an additional $10 billion to Indian markets, provided the sentiment towards India is right.
How are different segments placed now?
Indian mid-caps were trading at a discount of around 20% till the rally of 2016-17 took valuations to a premium. However, the situation is back to normal after the recent correction, and mid- and small-caps are now trading at a 20% discount.
Global growth is weakening. How will it hit markets like India?
Global central banks are trying to stabilise growth and have shifted from rate hike cycle to rate easing cycle. This will keep their bond yields and currency soft. This is enough reason for central bankers of emerging markets like India to not worry about inflation and currency fall when they drop rates or increase liquidity for spurring growth.
Are you expecting RBI’s loose monetary policy to continue?
Yes. Central banks of several emerging markets are doing this and our benchmark rates have come down by 110 bps over the past year. Domestic liquidity is moving towards a surplus due to measures like dollar swaps by the RBI. The RBI is expected to maintain this momentum. The government decision to raise money through dollar bonds will reduce cost of capital for Indian companies.
Will these measures arrest the slowdown?
The current slowdown is transient and should be over by the end of this fiscal. We already had a few soft quarters and the next one will be softer. There will be some recovery in the second half of 2019-20 and most of this recovery will be driven by government action to revive growth.
Segments like auto, among others, are reeling under a severe slowdown. Are these measures enough to arrest the slowdown?
If you look at the consumer discretionary space closely, you will notice there is no slowdown in the white goods segment. Most of these medium-ticket items are purchased using one’s own funds. Pressure is only on items like auto, housing, etc that need funding. So the demand slowdown in these segments should settle once funding problems, triggered by the NBFC crisis, settle.
The government announced a Rs 10,000 crore support package for NBFCs. When will we see action on this front?
The RBI circular regarding this loss guarantee scheme is expected soon and action will follow. You should note that bigger moves like bringing HFCs under RBI were also announced. In addition to cutting rates, RBI also took measures like reducing risk weight of consumer loans from 125% to 100%, increasing limits for loans that qualify as priority sector lending, etc. These measures should reverse the liquidity crunch and the slowdown pains.
Should one invest in NBFCs now?
There are structural changes taking place in the NBFC space. In addition to liquidity issues, there is increased supervision by RBI. Since the return on assets and return on equities that NBFCs will generate now is going to be much smaller than what it was in the last five years, investors should be ready for derating in some stocks.
What are the sub segments within the banking space that you like?
We prefer private banks that are concentrating on retail lending. The corporate lending space is also good as it will pick up in the near term. However, we would wait for clarity on the PSU banking space. They are going through some transition and we don’t know which bank will get merged with others.
Will capex recovery happen soon?
The capex slowdown is not that as bad as it is being made out to be. If you leave out the power sector and compare the last five years’ capex with that of five years before that, you will find capex has almost doubled. This is not coming into focus because the same is not happening in the big ticket industries like power, metals, etc.