 "Economy is stuck in the slow-growth lane: Prabhat Awasthi")
Markets have been volatile off-late amidst key economic data. Prabhat Awasthi, managing director and head of equity research at Nomura Financial Advisory and Securities shares his views with Tulemino Antao on the road ahead for the economy and the markets. Edited excerpts:
What is your take on the government's decision to lower GDP estimates to sub-5% growth for the second consecutive year?
There is no ostensible driver which can take the growth of the economy to a higher trajectory, at least in the near-term. Investment cycle is beset by policy logjam, slow decision making and multitude of other issues which include financing issues, lack of fuel for power generation, land acquisition difficulties for all projects amongst others.
The fact that very little major project capex has been committed in the last two years by the Indian private sector means that the slate of investment projects which can drive future investments has not been built.
Government finances, anyways, do not permit massive investments or spending and therefore the government cannot rescue the economy through spending or a stimulus of the kind provided by it post the Global Financial Crisis in 2008.
Finally, consumption demand, which was the primary engine of growth till very recently, is being weighed down by the travails of the consumer. High inflation, significant pass through impacts of currency depreciation, higher fuel and electricity prices are chipping away the consumer pockets. On top of this job market is beset by the slowing economy.
Only silver lining in this narrative is the recovery in global growth – but it can only do so much in face of the adversity due to domestic factors. In short, we are stuck in the slow growth lane, and till the environment does not become conducive enough for risk capital to start investing in the economy, we likely would find it hard to get out of this path.
What is your view on interest rates for calendar 2014 as inflation seems to be easing as of now?
We are closer to the peak than any time before in the last three years. Clearly the slowdown in demand will slowly filter through in the ability of producers to raise prices. Additionally, impacts of rupee depreciation would start to wear off slowly over the next six months. Overall, therefore, we should see some easing in the rate environment over a period of time.
What is your call on the rupee for the medium-term?
We believe that rupee would be comparatively stable at present levels. There may be some depreciation but given the significant decline in India’s current account deficit, the movement would be gentler. India’s ability to withstand potential liquidity shocks has improved significantly after the trade deficit has declined.
The ongoing spectrum auction has witnessed aggressive bidding. What could be the impact on earnings of mobile telephone service providers on the back of high acquisition costs?
The impact would be negative for sure. Till the time we have clear data about what is the exact payment by each company, it is difficult to make an accurate judgement about individual companies.
Recent manufacturing data from China indicates that the world's second largest economy is struggling. With demand likely to slow down going forward what is your outlook on the metal sector?
We are underweight on the metal sector since November 2013 and would likely remain so. There was an opportunity to buy the sector at cheap valuations in August 2013 when the stocks had sold off considerably. However, sector is off its lows and there seem to be no immediate catalysts for the sector at current valuations.
Recent data showed that factory growth in the US expanding at a slower pace in January. What could be the impact on top-line growth for the (information technology) IT sector going forward?
We think that the data is a blip in an overall solid recovery story. Apart from the US, the European business conditions are also recovering from the bottom which also would help the growth in the Indian IT sector top-line. The commentary from Indian companies remains solid. We are therefore not seeing a slowdown in IT sector on account of the slow data in January.
What is your take on the government's decision to lower GDP estimates to sub-5% growth for the second consecutive year?
There is no ostensible driver which can take the growth of the economy to a higher trajectory, at least in the near-term. Investment cycle is beset by policy logjam, slow decision making and multitude of other issues which include financing issues, lack of fuel for power generation, land acquisition difficulties for all projects amongst others.
The fact that very little major project capex has been committed in the last two years by the Indian private sector means that the slate of investment projects which can drive future investments has not been built.
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Government finances, anyways, do not permit massive investments or spending and therefore the government cannot rescue the economy through spending or a stimulus of the kind provided by it post the Global Financial Crisis in 2008.
Finally, consumption demand, which was the primary engine of growth till very recently, is being weighed down by the travails of the consumer. High inflation, significant pass through impacts of currency depreciation, higher fuel and electricity prices are chipping away the consumer pockets. On top of this job market is beset by the slowing economy.
Only silver lining in this narrative is the recovery in global growth – but it can only do so much in face of the adversity due to domestic factors. In short, we are stuck in the slow growth lane, and till the environment does not become conducive enough for risk capital to start investing in the economy, we likely would find it hard to get out of this path.
What is your view on interest rates for calendar 2014 as inflation seems to be easing as of now?
We are closer to the peak than any time before in the last three years. Clearly the slowdown in demand will slowly filter through in the ability of producers to raise prices. Additionally, impacts of rupee depreciation would start to wear off slowly over the next six months. Overall, therefore, we should see some easing in the rate environment over a period of time.
What is your call on the rupee for the medium-term?
We believe that rupee would be comparatively stable at present levels. There may be some depreciation but given the significant decline in India’s current account deficit, the movement would be gentler. India’s ability to withstand potential liquidity shocks has improved significantly after the trade deficit has declined.
The ongoing spectrum auction has witnessed aggressive bidding. What could be the impact on earnings of mobile telephone service providers on the back of high acquisition costs?
The impact would be negative for sure. Till the time we have clear data about what is the exact payment by each company, it is difficult to make an accurate judgement about individual companies.
Recent manufacturing data from China indicates that the world's second largest economy is struggling. With demand likely to slow down going forward what is your outlook on the metal sector?
We are underweight on the metal sector since November 2013 and would likely remain so. There was an opportunity to buy the sector at cheap valuations in August 2013 when the stocks had sold off considerably. However, sector is off its lows and there seem to be no immediate catalysts for the sector at current valuations.
Recent data showed that factory growth in the US expanding at a slower pace in January. What could be the impact on top-line growth for the (information technology) IT sector going forward?
We think that the data is a blip in an overall solid recovery story. Apart from the US, the European business conditions are also recovering from the bottom which also would help the growth in the Indian IT sector top-line. The commentary from Indian companies remains solid. We are therefore not seeing a slowdown in IT sector on account of the slow data in January.