While we expect deficit targets to be breached when the Budget is presented, one expects a more growth-oriented Budget, supplemented by a growth-focused monetary policy, says Saket Misra, managing director, strategic equity solutions, RBS Global Banking & Markets, in an interview with Puneet Wadhwa. Edited excerpts:
The gush of liquidity has taken the markets higher since the start of 2012. Is it time they take cognizance of issues on the domestic front, such as the widening fiscal deficit, growth rates, etc?
Multiple quantitative easing (QE) programmes across major economies had investors flushed with funds, and looking for investments. Liquidity combined with the rather dramatic fall in late 2011 has seen the markets move higher in significant percentage.
I would submit the issues have never really left the table — investors remain concerned with the relative inertia around policy implementation and reform, governance issues across main segments of economic participants and the twin deficits.
The rupee hit 54 (against the dollar) and then through administrative measures and reform in the investment regime has come back to the 50-levels, but remains under stress. Importantly, for new investment, it shows no signs of retracing the weakening of last year.
There may be intermittent liquidity driven spikes but the concerns continue to weigh rather heavily. Having said that, we are only about five per cent above the (Nifty) levels in October 2011. So, there is room for growth, provided the concerns are addressed.
Is the time right for retail investors to go on a shopping spree or, do you expect markets to correct from the current levels?
Any ‘spree’ would be an indulgence, given the continuing uncertainty around global economic recovery and market strength, as well the concerns highlighted above. Perhaps for the retail investor, relatively high-yielding debt remains a good option. On the equity side, buying in small lots on dips where value is seen may work well in creating a good portfolio.
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Given the global macroeconomic headwinds and challenges on the domestic front (inflation, interest rates, etc) how are foreign institutional investors (FIIs) viewing the Indian equity space vis-a-vis the other emerging markets (EMs)?
The sheer size of the economic opportunity in India makes it a relevant investment destination for FIIs. Having said that, capital is a scarce commodity and it flows into markets with greater surety of policy framework, governance, economic growth and overall ability to give a return.
India not only competes with the EMs but also the more developed markets and periodic “trading favourite” destinations. On most of the key investment-determining variables, India has lost some lustre.
Investors will be keenly watching developments around the Budget, which will, in turn, play a major role on the fiscal deficit and whether the almost-across-the-board slowdown in the manufacturing sector is soon reversed.
However, there are some positives emerging from India — core manufacturing inflation may be subsiding somewhat, overall growth focus of policy, earnings revisions bottoming out and asset quality of banks has held up better than expected.
What is your assessment/interpretation of recent economic data from the US and Europe?
The US economy is clearly showing signs of improvement. There has been employment growth, new investments and as improvement in savings. Overall, it is a healing economy but one with a long path to full growth recovery.
Europe is far from the healing curve, despite occasional positive stories from the German economy. While in isolation the deal on Greek debt, assuming it plays out as predicted, is positive, it remains a temporary sandbag wall against continuing high tides.
High debt to GDP ratios remain a concern across multiple European economies. The combination of negative sentiment around Europe and the impact of continued austerity across public sector will remain a major obstacle to real growth. As such, any recovery will be long-term, with significant re-tooling of the economy and probably an adjustment in the currency valuation.
What about China?
China continues to grow, albeit slower than consensus. Domestic demand remains robust. Retail sales are holding up well as is demand for property. The export sector is, however, facing headwinds from the global slowdown and the margin-depressing impact of increasing wages in the export-focused areas of the country.
Additionally, given the broader focus of the economy in exports, China has not necessarily seen the benefits of upsurge in technology-related exports, as in Korea or Taiwan.
Can you identify a few sectors/ themes/stocks in the Indian context where one can invest from a medium-term perspective?
Our themes remain constant — cash-flow generating, low-leverage businesses combined with a “consumption/retail” focus where there is further penetration possible in terms of consumers and usage. Sectors like telecom have been beaten down recently, represent interesting long-term bets.
Do you think the finance minister may refrain from announcing any big-bang reforms in the coming Budget, given the results of the recent Assembly polls? What are your expectations?
Despite contrary expectations, development (or the lack thereof), good governance and the common person’s security were important themes throughout the local elections.
Hence, the message would be to move forward more aggressively with reform and dial down on some deficit-increasing populist measures. A key determinant will, obviously be the sense of security the central government feels in lasting out its term and the consensus it builds around reforms. Any pre- or post-Budget instability which increases expectations of a mid-term election will inhibit the incentive for economic reform.
There may also be greater focus on encouraging investment in the infrastructure sector versus the recent emphasis on consumption-focused initiatives. Overall, while we expect the deficit targets to be breached when the Budget is announced, one expects a more growth-oriented Budget, supplemented by a growth-focused monetary policy.
Crude has been on a boil. What are the levels that we could see on crude, especially Brent, given the current geo-political scenario?
Oil remains a conundrum. We are in the range of the highs witnessed during the Libya uprising. The current highs are driven more by the geo-political situation and disruptions in oil-producing countries like Yemen, Syria and Norway.
Asia remains particularly vulnerable to global oil prices given that external oil deficits amount to 3.3 per cent of Asian gross domestic product (GDP). The impact, in India’s case, will either be in the form of demand contraction which will lower growth, or macroeconomic accommodation measures that give rise to fuel inflation pressures and worsen deficits. India, in any case, has limited fiscal space to follow expansionary fiscal-monetary policies to counter the impact of higher oil prices on growth.