 "We are seeing turnaround of capex cycle: Madhusudan Kela")
"Last year, I was perhaps the only bull left in the market," is Madhusudan Kela's opening sentence. And with the S&P Sensex up 28 per cent in the past year despite the recent correction, he feels that this bull run may last for another five years. Kela, chief investment strategist, Reliance Capital, which manages Rs 1.5 lakh crore of assets, tells Joydeep Ghosh that while any meaningful capex cycle will take 12-18 months, what matters to investors and companies isn't the timing of the interest rate cut but whether it would be a distinct change in trajectory. Excerpts:
After the initial euphoria of the stock market due to a stable government, are there signs of waning interest?
There aren't any signs of long-term euphoria still. Though hopes are riding high but the expectation from the new government isn't still getting reflected in stock prices because any material change in the fundamental variables will only happen in due course. In the interim, markets will keep pricing in its possibility.
The new government is yet to announce any big bang reforms. What makes you so confident?
The new government was expected to make some very big announcements. But it is doing things in a systematic manner. Problems are being approached from the fundamental perspective. There are serious long-term pending issues like the labour problem and the coal problem, but they are being handled. When the patient is in the ICU, you cannot give steroid and make him run. You have to resolve the problems one-by-one. Most importantly, a conducive environment being created now for businesses and companies. All this is very heartening.
But the capex cycle is yet to take off...
There are early signs of capex cycle turning around. For the first time, we are seeing jump in new project announcements and revival in stuck projects. However, meaningful recovery in real investments will take time, anywhere between 12-18 months. People have to get confidence and markets have to do well. Today lakhs of crore worth of projects are stuck at various stages. Once they get sorted out, things will improve. The good news is that inflation is under control even though the monsoons haven't been so good. Government is taking a number of steps to boost corporate sentiment like scrapping irrelevant laws, addressing the land and labor reforms and the recent Make in India initiative.
Is the recent volatility in global markets a threat?
The recent correction in global asset markets has been primarily due to two reasons: Global growth has come under pressure with countries in Europe flirting with recession and the scare of Ebola wherein one is still to gauge the seriousness. The sharp and unexpected correction has wiped out more than one-year return for most of the major markets. That said, this has raised the possibility of global central banks keeping monetary policy easy for an extended period. The US Fed could defer rate tightening given the current deflationary bout. Add to it, fresh liquidity infusion from Europe and Japan central banks in form another round of QE. This combination of easy monetary policy and recent correction could help markets to rebound once the dust settles. Indian markets will also resume its uptrend once the stability sets in the global markets.
How will the fall in crude oil and commodity prices impact India?
The recent fall in global commodity prices will lead to tremendous improvement on the macro front. For a strong and sustainable cyclical recovery, India needs two structural adjustments - lower inflation & narrower current account balance. Recent fall in the Brent crude oil, in particular, and other commodities bode very well for both the above factors. Just to highlight, a dollar fall in crude price means almost a billion dollar worth saving for India. Taking from the peak to trough - $115 to $84 per barrel - there is a fall of $31. Even if we assume that on a full-year basis, crude oil prices fall by only $10 per barrel then also 0.5 per cent of current account benefit will accrue. The impact on inflation will be around 30 bps in the CPI and 60 bps in the WPI with a 10 per cent fall in crude oil prices. In the last five years, we have seen rise in diesel prices, for the first time, there has been reduction. So, there is benefit for everyone. Beyond that, a permanent liquidity leakage in the form of oil imports is being reduced which is very positive from domestic liquidity perspective. These overall adjustments would have taken a lot of time had them, if left to domestic factors alone.
Will it encourage RBI to cut rates sooner than later?
Timing of the cut is less important. As an investor, it really does not matter when RBI cuts rates by 25 basis points. What matters is a decisive change in trajectory. When we enter a proper rate cut cycle, it will become important from the market perspective. When there is a cut of 100-150 bps over a 12-18 month period is what will really impact the market. A 25 bps repo rate cut does not make or break the investment climate. What would be critical is when we enter that phase where we experience prolonged rate easing cycle. It happened in the last NDA regime, when the 10-year bond yield was at 5.5 per cent and inflation was as low as 2-3 per cent. Growth versus inflation dynamics clearly warrant rates to be lower. There is a good chance of a token rate cut by Q1FY16. However, international factors must also be weighing on the RBI's mind to go for definite shift in their policy stance. While Indian rate cycle is moving down, it's happening at a time when global rate cycle may be bottoming. We may be entering a period where most countries may start raising rates; India would be cutting rates - something that has rarely happened.
How long will this bull market last?
I am hoping, at least, five years. Going by what improvements we are seeing in India and issues in other countries, even if we grow at 7-8 per cent, we will be among the fastest growing economies in the world. India can attract a lot of inflows even if the global situation remains where it is. What was missing in India was a positive sentiment and decisive policies. With now these factors on India's side, the up cycle should be reasonable prolonged.
After the initial euphoria of the stock market due to a stable government, are there signs of waning interest?
There aren't any signs of long-term euphoria still. Though hopes are riding high but the expectation from the new government isn't still getting reflected in stock prices because any material change in the fundamental variables will only happen in due course. In the interim, markets will keep pricing in its possibility.
Also Read
Indian equities had an impressive rally in the last one year. While there has been a consensus crediting political developments in India for this rally, there are multitudes of factors which have contributed to this rally. Indian markets were extremely compressed and did not move for a long period (2008-2013, Nifty returns were flat). The rally has been well supported by the global markets and Indian markets were catching up. Local investor participation had fallen to record lows. Key macro variables started bottoming out much before elections. Leadership change has acted as a key catalyst and actually reduced the downside risk to Indian equities.
The new government is yet to announce any big bang reforms. What makes you so confident?
The new government was expected to make some very big announcements. But it is doing things in a systematic manner. Problems are being approached from the fundamental perspective. There are serious long-term pending issues like the labour problem and the coal problem, but they are being handled. When the patient is in the ICU, you cannot give steroid and make him run. You have to resolve the problems one-by-one. Most importantly, a conducive environment being created now for businesses and companies. All this is very heartening.
But the capex cycle is yet to take off...
There are early signs of capex cycle turning around. For the first time, we are seeing jump in new project announcements and revival in stuck projects. However, meaningful recovery in real investments will take time, anywhere between 12-18 months. People have to get confidence and markets have to do well. Today lakhs of crore worth of projects are stuck at various stages. Once they get sorted out, things will improve. The good news is that inflation is under control even though the monsoons haven't been so good. Government is taking a number of steps to boost corporate sentiment like scrapping irrelevant laws, addressing the land and labor reforms and the recent Make in India initiative.
Is the recent volatility in global markets a threat?
The recent correction in global asset markets has been primarily due to two reasons: Global growth has come under pressure with countries in Europe flirting with recession and the scare of Ebola wherein one is still to gauge the seriousness. The sharp and unexpected correction has wiped out more than one-year return for most of the major markets. That said, this has raised the possibility of global central banks keeping monetary policy easy for an extended period. The US Fed could defer rate tightening given the current deflationary bout. Add to it, fresh liquidity infusion from Europe and Japan central banks in form another round of QE. This combination of easy monetary policy and recent correction could help markets to rebound once the dust settles. Indian markets will also resume its uptrend once the stability sets in the global markets.
How will the fall in crude oil and commodity prices impact India?
The recent fall in global commodity prices will lead to tremendous improvement on the macro front. For a strong and sustainable cyclical recovery, India needs two structural adjustments - lower inflation & narrower current account balance. Recent fall in the Brent crude oil, in particular, and other commodities bode very well for both the above factors. Just to highlight, a dollar fall in crude price means almost a billion dollar worth saving for India. Taking from the peak to trough - $115 to $84 per barrel - there is a fall of $31. Even if we assume that on a full-year basis, crude oil prices fall by only $10 per barrel then also 0.5 per cent of current account benefit will accrue. The impact on inflation will be around 30 bps in the CPI and 60 bps in the WPI with a 10 per cent fall in crude oil prices. In the last five years, we have seen rise in diesel prices, for the first time, there has been reduction. So, there is benefit for everyone. Beyond that, a permanent liquidity leakage in the form of oil imports is being reduced which is very positive from domestic liquidity perspective. These overall adjustments would have taken a lot of time had them, if left to domestic factors alone.
Will it encourage RBI to cut rates sooner than later?
Timing of the cut is less important. As an investor, it really does not matter when RBI cuts rates by 25 basis points. What matters is a decisive change in trajectory. When we enter a proper rate cut cycle, it will become important from the market perspective. When there is a cut of 100-150 bps over a 12-18 month period is what will really impact the market. A 25 bps repo rate cut does not make or break the investment climate. What would be critical is when we enter that phase where we experience prolonged rate easing cycle. It happened in the last NDA regime, when the 10-year bond yield was at 5.5 per cent and inflation was as low as 2-3 per cent. Growth versus inflation dynamics clearly warrant rates to be lower. There is a good chance of a token rate cut by Q1FY16. However, international factors must also be weighing on the RBI's mind to go for definite shift in their policy stance. While Indian rate cycle is moving down, it's happening at a time when global rate cycle may be bottoming. We may be entering a period where most countries may start raising rates; India would be cutting rates - something that has rarely happened.
How long will this bull market last?
I am hoping, at least, five years. Going by what improvements we are seeing in India and issues in other countries, even if we grow at 7-8 per cent, we will be among the fastest growing economies in the world. India can attract a lot of inflows even if the global situation remains where it is. What was missing in India was a positive sentiment and decisive policies. With now these factors on India's side, the up cycle should be reasonable prolonged.