 "We do not see the Fed hiking at a brisk pace anytime soon: Tirthankar Patnaik")
The US Federal Reserve's rate increase was in line with market expectations. What did surprise it was the aggressive stance that indicated more of these in the coming calendar year. Tirthankar Patnaik, India Strategist at Japan-based Mizuho Bank, tells Puneet Wadhwa an aggressive monetary policy stance in CY17 by central banks would depend significantly on the trajectory of growth revival. Edited excerpts:
Your interpretation of the outcome of the US Federal Reserve meeting? Is a brisk pace of hikes in 2017 a threat to a global equity market rally?
Near consensus on the rate hike (overwhelmingly at 25 basis points, with a minority gunning for 50 bps) meant market expectations were built around the commentary, with focus on specific items like the number of hikes in 2017, the Fed’s comfort with economic conditions, growth, jobs and the inflation trajectory.
In the event, the Fed’s programme of three hikes in 2017—one more than consensus expectations—was a tad negative for the market. What didn’t help was Janet Yellen’s view in the post-policy conference on the need for a fiscal boost not being obvious and that the ratio of debt to gross domestic product having to be kept in mind when considering measures to raise productivity.
We do not see a brisk pace of US Fed rates hikes anytime soon. And, do not expect the next one before June, at the very least. Growth in 2017 would have a larger bearing on equity markets. Steady (prices of) commodities, especially crude oil, a resilient China, and economic recovery in the US and Europe would be key drivers of the global equity markets.
Do you see tighter monetary policies by major central banks across the globe in CY17?
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An aggressive monetary policy stance in CY17 by central banks would depend significantly on the trajectory of growth revival, regardless of the assumptions or estimates made in the beginning or before the start of the year. We hark back to the 2015 rate hike, which raised the Fed Funds Target Rate for the first time since 2007 by 25 bps. The expectation was of four hikes in 2016 to begin with but a weaker than expected global environment left us with one. Calendar year 2017 does not look any more stable from here, relatively speaking. Oil has started rising, the Chinese economy continues to see significant pressure and we do not yet have a handle on (US President-elect) Donald Trump’s economic model.
How are the emerging markets likely to play out in this backdrop? Do you see the pace of flows get slower over the next few months as investors flock to developed markets?
Capital flows to emerging markets (EMs) have already slowed down considerably over the past few months, on anticipation of tighter global rates and an expansionary US policy. India’s FII (foreign institutional investor) outflows since September have been $2 billion on equities and $5.5 billion on debt. We do not see flows returning before the new President assumes charge in the US, and some clarity emerges on the shape of the eventual economic policy to be followed there. The direction of the US economic policy would also determine the direction of the dollar, which has seen renewed strength since the election results, rising four per cent to 102-levels on the DXY index, in anticipation of fiscal expansion and commensurately rising rates.
However, the recent Fed commentary on the matter, pointing to the lack of an obvious need for a fiscal boost as mentioned earlier, should weigh on the dollar in the near term. A strong dollar has been bad news for EM inflows, historically speaking, and we remain cautious in this context.
How do you see the Indian markets over the next three to six months?
Beyond the current crisis (of demonetisation), we continue to remain strongly positive on India. The economy continues to be better than most EM peers but the near-term negatives has necessitated a realignment of sector choice. We are positive on financials, pharmaceuticals, and utilities in the current environment, neutral on information technology services, energy, industrials and materials. We are cautious on telecom and the entire consumption space but are getting gradually constructive on durables.
How are foreign institutional investors seeing developments in India? What are their key concerns?
The Indian economy has been one of the fastest-growing in the World today, with sound macro fundamentals, relatively speaking. Inflation is well under control, the twin-deficit problem isn’t really a concern anymore, and unlikely to change in the near-term. Despite the near-term glitches, the GST would usher in a significantly better commerce across its various states, with a wider tax base, an increasingly formalized economic environment. All the long-term positives, like demographics, some of the World’s largest markets, and massive infrastructure demand remain true as well. It’s not surprising therefore, to see sustained foreign interest in our markets.
There are near- to medium-term concerns regarding the impact of demonetisation. While there’s near-universal agreement on the idea on paper and the long-term positives are beyond doubt, implementation has raised questions on preparedness, efficiencies, and of cost-benefit analyses which offer sobering conclusions. We believe the current slowdown in the economy, led by the twin issues of the lack of a transaction medium (particularly in the rural areas), and a negative wealth effect, would be exacerbated if the cash crunch continues.
There is collateral damage as well—the current session of Parliament is practically washed out, and the Budget session looks set to see continued acrimony, particularly given the proximity of important State elections in March/April. What was beginning as an example of Center-State cooperation (cf. the GST Council recommendations) could now go the cold storage. Further, a defensive Government might defer fiscally prudent measures like timely price hikes on auto fuels to curtail any rise in oil subsidies. Credit rating agencies have been relatively sanguine thus far, marking near-term pain on the economy, with long-term benefits, but continued support would depend on a quick revert to status quo ante.
What is your assessment for corporate earnings growth given the demonetisation? For how many quarters will the growth be impacted? What are your revised estimates for FY17 and FY18?
Our assessment of earnings growth this year was 14-15% before demonetisation. These were based on GDP growth of 7.4% and 7.5% in FY17/18 respectively. As mentioned earlier, things can unravel fast unless the cash crunch is addressed soon. We see growth down to 6.9%/6.8% for FY17/18 respectively, but the impact on earnings may not be impacted to the same extent, given the share of earnings between Energy, Financials and IT Services, sectors indirectly linked to the consumption shock. We believe NIFTY earnings would rise 11-12% in FY17, and nearly 20% in FY18.