 "Foreign investors likely to become sellers again: Saurabh Mukherjea")
The markets are almost back (down) to where they were when Narendra Modi took charge as prime minister.
We became pessimistic about Indian equities in March 2015 when the Sensex touched 30,000 points. We continue to remain so because of what I call the Modi-Rajan-Technology reset and the external factors. Whenever we have had major policy reform in India which changes the rules of the game, the stock market churns heavily. This happened in the six years following the July 1991 reforms, with 20 of the 30 Sensex constituents were booted out of it.
In March 2015, we reckoned the Sensex was again entering such a period of adjustment. There is a concerted effort to arrest black money and welcome foreign direct investment (FDI) into India. Also, the Reserve Bank is overseeing the disruption of the banking system and reduction in capital flow to crony capitalists. These are seismic changes and might take two-three years for the economy and market to adjust.
To me, it appears naively optimistic to believe that the actions of a well-intentioned government and a reformist central bank chief should result in the stock markets flying high.
Has the external environment improved since last August?
Going by what the Bank of Japan (BoJ) said two weeks earlier, more negative data might be on the anvil. The European Central Bank policy (review statement) on June 2 and the (US) Fed policy thereafter might be on similar lines. In the past six months, no developed country which has gone into negative interest rates has reported economic improvement. Negative interest rates are a slow death for the banking system. Central bankers are throwing their hands up and saying easy monetary policy is not yielding any incremental benefit.
Back in the emerging world, since neither expansionist fiscal policy nor easy monetary policy has been able to stem the slide in Chinese economic growth, the central bank there might let its currency slide by 20 per cent over the next couple of years.
If the Chinese let their currency fall further, India and other emerging markets (EMs) will also let their currency slide. We’ve had 17 months of falling export and Rs 66 to the dollar looks unviable for India. When you have the next major bank fall in the West or in Japan, or the central banks give up on monetary easing or China lets its currency fall, equities across the world will also fall.
Foreign institutional investors (FIIs) were sellers in 2015. After an interim period in 2016 as buyers, they are again sellers. How do you see the trend?
FIIs are likely to become sellers again as there are many negative catalysts haunting global equity markets. Western central banks and the BoJ have pumped $5 trillion into the global system since the Lehman debacle (of late 2008, which led to the global financial crisis) and India has got some of this. With quantitative easing coming to an end and the US Fed hiking rates, risky asset classes are pulling back. For instance, property prices in Europe are correcting. Commodity prices have been correcting for four years. The last man standing is the equities market, whether in the West or in India. We touched 30,000, a Sensex high, last year and might do that again. But, fundamentally, the outlook for equities looks challenging.
Earnings so far have been disappointing. What’s your view on their trend?
The consensus is making the same mistake in FY17 as it has in the past two years. Earnings expectation at the start of the financial year is at the high teens; it then tapers by Diwali and settles at three-four per cent by the end of the financial year. This cycle is again playing out.
As for the banks, I see at least four quarters of increasing provisioning levels. The current level doesn’t seem adequate. The provisioning to stressed assets ratio might go up to 30 per cent. The ultimate challenge is recapitalising these banks. Every time a clean-up happens in the Indian banking system, the economy is twice bigger than it was when the loans were lent. This will be the third clean-up for Indian banks in three decades and we can’t afford another once-a-decade cleaning.
Monsoon-led consumption spending seems the only theme working for now.
FDI money that percolated in India last year has been consumer-oriented, whether it is cheap taxi rides or consumer electronics or even jobs in the dot-com space catering to these segments. This has buoyed into the aviation, passenger vehicles and food & beverages sectors. Banks are bending backwards to give home loans, car loans and credit cards, and the urban consumer now has easy access to credit. With the pay commission rollouts, I think this trend will continue in FY17 and urban consumption will be a good theme. But, I have never understood the monsoon or timed the market on its basis.
Do you view the state election results, due in a day, as a game-changer for the markets?
Other than in Assam, the (ruling) NDA is not expected to be a political force in other states. To the extent that Assam could turn out to be the NDA's first taste of success in assembly elections in one and a half years, the market might cheer the result.