The market has started to settle as it now knows demonetisation impact will be short-term, says Sunil Subramaniam, CEO of Sundaram MF. Gross Domestic Product and consumption will take a hit in the next few months, he says.
However, the global dynamics have changed with cyclicals back in place. Emerging markets (EMs) will benefit from the infrastructure boom in United States. Indian companies will provide supplies for the US infrastructure.
Subramaniam further says broader markets are expected to grow in the range of 8-10 percent.
Demand will rise sectors like capital goods, cement and infrastructure players.
Below is the verbatim transcript of Sunil Subramaniam's interview to Prashant Nair and Ekta Batra on CNBC-TV18.
Ekta: It is one month since demonetisation, we have recovered from 7,930 level that we saw on the Nifty, things seem to have settled? What are your thoughts?
A: Markets have realised that the demonetisation effect is short-term. So the next two quarters, both consumption and gross domestic product (GDP) are going to take impact. The inflation which will come down because of consumption coming down, Reserve Bank of India (RBI) put cold water on everybody and put a practical thing saying let us look at long-term. Yes, two quarters inflation may be down but longer-term oil prices are going up, commodity cycle is turning back up, so that is why RBI did not do the rate cut. That is some sanity prevailed.
The market has been running ahead saying because of demonetisation, inflation is down, will rate cut happen, as usual market gets into a frenzy. That has come down now but what is important is that the global dynamic has changed. So if you look at it internationally, post the global financial crisis, they first started off by not printing. The next they went to rate cut.
The third thing that the governments do, what they should have been doing some time back is fiscal stimulus because both with rate cuts as well as with the monetary policy, they cannot assure that the money will remain in their country. It can easily flow but as fiscal stimulus, it is more like spending on infrastructure, roads, airports, ports, that will remain within respective countries. You see Japan has said they are going to stop helicopter funding, ECB has said that they are going to tone down the money printing. US with Trump is again going to shift more into fiscal stimulus has approved. They have stopped monetary stimulus ever since they announced the tapering. So the dynamic in the world is towards fiscal stimulus, which means that global cyclicals are back in play which is good news from India.
Prashant: If globally fiscal policy takes the front seat, what is fiscal stimulus, it is pump-priming the economy. If US does fiscal stimulus, it does fiscal stimulus to build roads, bridges, hospitals in the US whereas monetary policy is essentially giving money to banks so that they can lend. Now that banks were not lending because there was not that much demand for lending and money is fungible. It came across to all emerging markets etc. Monetary policy is far more advantageous for emerging markets and outside countries as compared to fiscal policy. Fiscal policy will benefit those nations where it is done?
A: What I would like to differentiate is the markets from the economies. So what you said is true of the markets. That is emerging markets will get hurt by the lack of fresh monetary stimulus happening but the economies -- because when US builds roads, all the commodities they need, they need steel, they need coal, they need energy, they need people to supply capital goods -- emerging market economies are going to benefit hugely because US doesn’t have people.
They are talking about job creation and unemployment rate coming down, they just don’t have enough low cost labour to do all that work. That is going to get done in emerging countries and shift across the US. So this is the biggest positive for emerging economies. So yes, markets in the short run will see not an increase in the liquidity.
Prashant: In a big infrastructure boom in the US, what can India supply?
A: India can supply all the small parts which get into the big machinery that is one.
Second is if you look at it for GE or any big corporation in the US, what Donald Trump is emphasizing is that suppose he gives infrastructure contract out to a company like GE, where he makes these small parts supplies and gets it over which is where our Make in India programme comes in and then will get it shifted there because they know that for Trump -- he is a businessman, ultimately he doesn’t want to pay more for a road just because he wants US labour to be involved in that road construction. so the point is that while Trump will make noises about saying I created more jobs here, when he gets into infrastructure spending and that leads to job creation there, a huge portion of that is going to be made in countries like India, China and Indonesia which are population surpluses.
Ekta: We have to talk same time next year when most of these things would start fructifying once he gets into office officially in January where would be the Nifty be on account of this?
A: The 30 stock thing which you are asking me to predict -- the economic impact is going to be felt more across the BSE 500 rather than Nifty. I would say that a year from now, the broader market should be up at least 8-10 percent whereas the Nifty would be less up because it has liquidity playing a part in its stock whereas if you look at domestic cyclicals -- the other thing which is going to benefit here is that the government also thanks to demonetisation is going to have a better fiscal health on budget. So budget is probably going to show greater infrastructure spending from the government. So domestic cyclicals are also going to start the recovery.
So you are going to see energy, you are going to see capital goods, cement, steel, all of those going to rise because their price are linked to international prices. So one of the things when you look at from domestic companies part -- one is demand from India, second is because the US is creating demand for steel and cement, those prices as they go up, Indian prices of those products will go up. So those companies will benefit here purely by an international -- China, consumer durables is on rise, you have seen the statistics there. So the world is now going through a phase of the commodity boom again happening, OPEC is again agreeing on cutting production, so we are going to see a USD 50-60 per barrel level. So this month has been very significant right from October onwards in the tactical shift one in terms of monetary was fiscal, second in terms of demonetisation. So these things have fundamentally altered. So if you see domestic portfolio managers, that portfolios are going to show now increasing allocations to global cyclicals.