Liquidity would be the key global growth driver in 2013. Corporates and global markets are assuming easy flow of funds throughout this year. Liquidity will not be tightened across Europe and US in 2013, Uday Kotak, executive vice-chairman and managing directorof Kotak Mahindra Bank said in an interview to CNBC-TV18.
He expects portfolio investments to pour into India, but strategic investors will sit on the fence in 2013. "Strategic investors are more cautious about Indian markets, but portfolio investors would pump in money into the Indian market given the abundant liquidity and very low interest rates globally," he elaborated speaking at the world economic forum (WEF) in Davos.
Meanwhile, in the short run, US may clock lower growth of around one to two percent, but it may bounce back in the medium-term. For Europe, one can expect low to zero growth in the short-term and in the medium-term it is still uncertain, he added.
Below is the edited transcript of Uday Kotak’s interview with CNBC-TV18’s Menaka Doshi
Q: What you are gauging of the global mood here in Davos, given all your conversations with business leaders ever since you arrived. Is it one that is more optimistic or one that it is hopeful of stabilization not a recovery?
A: The world this time around particularly about Europe is more comfortable that there is no crisis; especially in the short run unlike last year when the biggest debate was does Europe get into a crisis. So, from that point of view, the world is a little more comfortable. At the same time through 2013, corporate and the financial world is assuming easy liquidity.
The issue with this situation is that it is leading to some amount of complacency that the central banks and the politicians will ensure easy liquidity, low interest rates and though growth will be slow in fact in Europe maybe close to zero no crisis therefore we will chug along. The issue which one has to keep in mind is that when you start getting more complacent about markets you also begin to have a fat tail.
Q: Maybe people are not expecting this withdrawal of the monetary stimulus but what are you expecting? Given that not very long ago, a few weeks ago we saw minutes of FED meeting that indicated that several of the voting members thought that soon it will be time to start withdrawing from the billions and trillions of dollars that central banks have started pumping into the economy?
A: With Draghi and Bernanke being there and more concerned about recessions and depressions I would be surprised to see any tightening of liquidity in 2013. 2014 is another matter we can talk about it then, but as of now for 2013 looks like easy liquidity.
Q: You struck a stable note for Europe based on your assessment. What about the US? Growth will be maybe one or two percent I think the most positive outlook is three but I think the more important issue is the politics in the US. We have went past the fiscal cliff to now be faced with the debt ceiling issues and that is going to have a substantial impact on the US fiscal deficit. How do you see this evolving over the next two to three months?
A: US, interestingly is looking like lower growth in the short run, one to two percent mainly because of issues around politics between the different parties. Medium-term US looks like it has the ability to come back because of Shale gas and various other creative stuff which US is doing. So, US is a picture of short-term lower growth, but it is getting better in the medium-term. In the case of Europe, short-term low to zero growth and medium-term uncertain, that is the difference.
Q: What I have been picking up from the people I have talk to seems to indicate that there will be growth, not too much of it, but most of it will come still from sweating existing assets cost cutting, efficiency not necessarily expansion, hiring, new businesses, new programs. Given that scenario, do you think that this year will be the year we will see that USD 1-2-3 trillions that’s sitting on corporate balance sheets being put to work globally in terms of investing in new businesses or do you think that will have to wait till 2014?
A: At least in the first half I don’t see it happen, but as things develop during the year and if there is more confidence which comes in you could see some of that. It will be safe to assume that not much of it will happen at least in first half of 2013.
Q: Based on what you have drawn out for me have the markets over-run themselves, globally not just in India given that we ended 2012 on multiple year highs on the S&P and the DOW and that sort of bullish phase continues into the new year yet everything we hear about the fundamentals of the underlying economy is not glamorous at all?
A: The policy makers in the world have taken a framework which is, give markets the steroid, so that the economy holds. In some way, this has worked because we have avoided a crisis whether it is the US, whether it is Europe. Both Bernanke and Draghi ensured that the financial markets continue to hold up while the economy did not run away it at least held up and we did not see a crisis.
Q: But as we stand today do you think that we are looking into the face of a substantial correction in global markets given that this year is really not going to deliver much growth?
A: The real test for the world is going to be the currency wars because everyone is in the business of competitive depreciation of their currencies and none of the currencies can keep on depreciating against each other.
Q: We saw better than expected strength in the euro last year, the dollar continues to play both roles – the weaker role when it comes to the US fiscal deficit and the more stronger role when it comes to the safe heaven with what’s going on in Japan, there is forced weakening of the Yen, we have seen that in Switzerland as well. How do you see this currency issue play out vis-à-vis of course the rupee?
A: The long-term solution is either you cut fiscal deficit or you inflate your way out of it. If I had to be a betting man, most politicians would at some point of time prefer inflation over doing the hard stuff. That is why I feel that the world is going to see significant back ended inflation as a solution to the huge nominal deficit problem.
Q: What does that tell us about which currency will win in this currency war that you pointed out?
A: If you look at it right now, the interesting battle is the euro has begun to appreciate because as stability comes in people are saying the euro seems to be under-valued, but it helping the US. It is letting the US get a little bit of breathing space and in many ways today the two carry currencies in the world have become the US dollar and the Japanese Yen.
Q: You expect that to continue through the course of this year?
A: Watch out for not only the US dollar but also what happens to Japan and the Japanese Yen in the last few weeks has depreciated nearly 8-10 percent against the US dollar and that is a lot.
Q: Are you picking up positive signals about India from the people you talked over here because I am not.
A: There are two categories of investors right now, strategic and portfolio. Strategic investors are more cautious, the portfolio investors are still ready to put money into the Indian market especially considering that there is lot of liquidity and very low interest rates globally. So, India is therefore likely to see more portfolio flows rather than FDI.
Q: What is your expectations the markets priced in at 25-50 basis point cut?
A: Through the first quarter whether it is January and or March we should see a total of 50 basis points cut.
Q: And is that going to be enough to stimulate growth as CEOs keep asking for it?
A: You just can’t cut interest rates too much keeping the external vulnerability of the country and therefore you have a huge current account deficit. Oil is not going down, we are still at 111-112 and that is the biggest item of Indian imports right now.
Q: Last year when we met we were talking about gold. You were talking about how urgently the government needs to do something to stem the gold imports coming into the country. Since then we have seen two duty hikes. Can you give me the broader view of how you see our deficit fixing efforts work out through the course of this year?
A: On oil, I do believe that the diesel price deregulation if I can use that word – it is tiny but if they keep on taking baby steps that will be good news and that can help. But we must not stop the baby steps.
Q: Some Rs 10,000-12,000 crore is what they seem to have estimated.
A: But in my view if you do 50 basis points or 50 paise every fortnight or something like that, I think you will get a long way over time. If we do through this year even Rs 4-5 on diesel, half the subsidy is taken care of but that’s what I think the politics of the day will permit the government. However, it is a positive step. On gold we have to fight the battle two ways.
One is the battle which we are fighting through duties and everything. Second is to make Indian financial assets more attractive for Indians. One of the most interesting paradoxes of the last 12 months for me is that India is importing foreign savings into Indian equities and exporting Indian savings into foreign gold. It is time Indian savings went into Indian equities. If I would like to see significant policy initiatives, it is in encouraging Indian savers into Indian equities.
Q: What is it going to take to bring both domestic institutional investors and retail investors back into Indian equities and can anything be fixed let us say in the short-term way for instance the Budget that’s coming up?
A: Markets go up on walls of worry. 2012 calendar, Indian equities gave investors 25 percent returns. The Indian investor through this entire period remained skeptical, but 25 percent annual return is certainly pretty good. I would like to see some more boost in terms of reducing post tax hurdle rates on debt and debt instruments because there are many tax free and tax arbitrage instruments which increase post tax returns for savers.
So, as a result of which a lot of money is in high post tax returns in debt. Make a scheme like Rajiv Gandhi Scheme or another scheme far more attractive. The Indian saver who is going to come and put his money into financial assets is not a financial inclusion saver.
He is the one who is passed buying his first refrigerator, his first television and has disposable surplus. So, that is the target audience for Indian equities and that is the one who is buying gold. Go after that saver who is more in the mass affluent category and have a scheme which attracts him into that financial asset that is the way you compete against gold.
Q: We have known all this and yet we haven’t been able to do what it takes despite efforts by SEBI maybe to some extent by the finance ministry to bring investors back to this market. Is this something that’s going to get fixed or resolved over the course of this year or next or this is a far longer term program that needs to play out?
A: I do believe that our current Finance Minister is sensitive to what is happening in the marketplace. I have hope and confidence that we will see measures, which stimulate Indian equities for Indian savers and that will be the best competition for gold.
Q: Are you ignoring the fact that this Budget is also likely to be a revenue raising Budget? There is no doubt that we are all going to have to pay higher taxes over the course of the next year or two. In the face of that do you think any moves to bring investors back to the equity markets are really going to succeed?
A: Investors play the markets on two criteria. One is micro companies which may have some pain because of some revenue raising measures by the government, but if the macro fiscal deficit situation looks better that will give a lot of confidence to investors who are playing the macro India theme.
Q: If personal wallets shrink because of higher individual income taxes if that at all is a possibility according to you then doesn’t that disincentivise people from saving and investing?
A: I believe the personal wallets are large enough to be able to accommodate more money into equities.
Q: Are you expecting taxes to go up both on the corporate as well as the personal income side?
A: My view is marginal. I don’t expect anything significant. More tax corrections will happen in the indirect side including in the oil sector. I am a believer that we will see for 2013-2014 a budgeted fiscal deficit number projected sub 5 percent.
Q: The other part of this problem is getting the investment cycle going. What is your view based on all the companies that do business with your bank, when do we see the investment cycle come back?
A: We have so far talked about markets. I believe the economy is behind the markets and it is lagging the markets.
Q: So, the markets will run ahead?
A: Certainly, but markets going ahead can help fix the economy. Number one it is going to give capital to banks who are supporting these companies and maybe at a second stage give some direct equity to some of these companies, which will happen not in the first stage but maybe later. In terms of the investment cycle, we are 12-18 months away.
Q: But that doesn’t look good at all.
A: But that is the reality. It is not like a button.
Q: If we saw the markets rally 25 percent 2012 there were ample opportunities for companies to come in and do their fund raising yet all they seem to be talking about is reduce interest rates, make debt more affordable to us.
A: But that is pretty clear why because a lot of these companies have high leverage, the equity values are low and therefore markets going up is not dramatically changing their equity values. They need lower cost of debt to first fix their excessive leverage.