Do you think markets are due for a time-wise and a price-wise correction given that this market is suddenly running out of positive triggers?
There are still some positive triggers left and that depends on the government and not as much on the passive economy. But clearly the market will have to catch up on profits because it has already run up in anticipation of profits and growth and in terms of growth going forward. We are talking of 9.3% growth for FY22 over 7.3% negative for FY21 and that is being factored in.
Do not forget we had a great monsoon last year and that food grain output was 303 million tonnes and horticulture outflow was 327 million tonnes. There is a lot of agricultural income reflected for instance in tractors demand and in February it showed 18% growth . There is still some pent-up demand in passenger cars as these are growing at 10%. But the pent up demand story is pretty much getting over in consumer products and two-wheelers.
So what will sustain is the anticipation of profit growth and the economy growing and we must grow faster than the world. The world is doing well. The United States with a $1.9 trillion stimulus and $1,400 check is expected to grow this year at 6.5%. The OECD said so yesterday and the Fed confirmed it. OECD countries are expected to grow at 6.2%, the European Union is supposed to grow at 3.9% and of course the world economy will grow at 5.6%. There is momentum just now. If we can grow faster, we will attract money. It is growth that attracts money and if the upside happens, prices will sustain. Also if we continue with growth, then the profits will catch up. That is where I am very optimistic that it is not going to be a correction. There is going to be inflation and the Fed has confirmed it. There is going to be interest rate increases going forward as well. But at least for the foreseeable future, if we do not have a major problem with pandemic, we will be in much better shape.
There are two-three things that government has to do for that. One is as Mr Modi said, increase the vaccination centres. Just open it up for the private sector to participate and give doses. People do not have to feel forms in the United States. They are giving a little card which is hand written so that the people who are literate, illiterate who do not have any access to the internet can still go and get a shot. Then of course, there is fiscal, monetary and supply side management.
Mr Modi can consider putting up an empowered panel of these three sectors to oversee inflation in prices of edible oils, food grains, vegetables etc. If these prices are controlled, then it hurts us less and third of course, cut down on bureaucracy. If all these things are done, we will see growth. China grew at 13% for several years on end.
Should one stay invested in stocks or is it time to raise 25%-30% cash? Is this just a blip and a year from now this will look like one of the best spring buying chances?
If we are a high growth economy we will continue to grow. There will be temporary ups and downs in the market, sentiment changes. Some actions by the government will cause some dips and so on but the secular trend is up for the Indian markets because of the growth that we see. It will be a superior growth as compared to the western world and even the developing world.
It is very difficult to pull out of equity markets and where do you invest in? Debt instruments have credit risk as well as interest rates risk and of course inflation risk. Your income gets eaten up by inflation. So, you can recycle from very high multiple stocks and get into relatively lower priced stocks where multiples are lower. There may be slight adjustments required. For instance, when inflation picks up, some commodities will do well. You can pick those up and again there are still relatively better prices than some of the other industrial companies going at multiples of 15 in the current market. There is over exuberance in some of these companies. So. capturing those gains but staying out of the market is a big challenge. Stay out of the market when you have anticipation of higher inflation and the alternatives are not as attractive.
How are you monitoring when it comes to financials because while NBFCs have had a great recovery from the March lows, I cannot say the same about banks?
We have seen superlative performance from banks like HDFC Bank, very good performance from ICICI and Kotak. Not all the banks are in the same boat. Some of the public sector banks like
will also do well thanks to the technology that they have adopted, the Yono app etc.
So, there are good banks even in the public sector, but those banks which are handicapped by their organisation, the system and technologies they are going to be affected. There will be a consequence of the legacy lending that these banks had done. Most of these banks will be able to absorb the moratorium shock going forward. There are problems in lending and also in microfinance which has become a holy grail. Everyone is running for it. The main thing about lending is diversification. Small loans are very good but there has to be diversification by geography and sectors. It cannot be all professionals or self employed people. A universal bank is a much better choice as it has distributed assets in different classes of lending and has good systems and processes. The management is the ultimate driver. One has to see how the management has demonstrated its competence.
But banks are not write off. Rather I would be worried about NBFCs. Some of them have got excessive zeal in their pricing and some are trashed and some are too optimistic with the lending businesses. They may learn as they go along that concentration in just microfinance or something is not a great idea.
Given that across commodities, price hikes are coming in steel, agri commodities and even the paper industry, packaging costs are going up across the board. Is it going to bear heavy when it comes to earnings because the choice is either between volumes or margins and at some point the profitability will be eaten up at least for the pure play staples at least?
All companies will see this cost push factor reflected next year and so unless they grow faster and come out with newer products which can command better value and therefore better margins, we are going to have problems with profitability. Their profits will not be maintained on the same levels as last year’s unless they have growth and they make up in absolute numbers. But certainly margins are going to be under pressure for almost all companies because of the cost push.
On the inflation side, the government must do something and make the economy much more elastic in supply. It means reduce the bureaucracy, reduce the hindrances that exist in our economy, the permissions raj and the license raj and hassle raj so that supply can flow. If there is inflation, more supply coming in quickly. Number two, the government must recognise that fighting inflation with only monetary policy is not the answer, fiscal policy is required. So giving protection by having very high tariffs, helps industry grow but it does not necessarily counter inflation. The government must allow tariff calibration to be a counter to inflation not just in food products but also in industrial products. That requires a little bit of commercial acumen in the government and our regulators are not always as commercially inclined.
The focus is on the big picture. Mr Modi talks about the ease of doing business, ease of living and high growth for the economy but what that is forgotten in the narrow perspective — be it the revenue department or the Ministry of Corporate Affairs. They put in new conditions on whether it is independent directors or it is on CSR from a comply and explain or comply or explain, it has now become compulsory with prescriptive loading of CSR spend and of course detailed voting which means how much time and effort is being spent.
Look at the KYC requirements. Every bank has to comply with KYC, paper work, the number of filings they have to do. It is adding to their intermediation costs. Why do you need all that kind of KYC? Why don’t we have automatic renewal of KYC? Why do you not have KYC for a longer period that then every year and every two years? The Indian bureaucracy is looking at a narrow perspective and forgetting the big picture.
