Even though valuations in India have corrected materially, chief investment officer of Religare Mutual Fund, Vetri Subramaniam, believes that 2012 will be a challenging year for the country.
Q: Aside from the bond market, how much of an overhang will remain in the currency remain year, because it will impact both companiesí earnings and psychologically to see that 53 mark and talk of 55 somewhere down the year?
A: I am just hoping the currency doesnít prove to be as bad as it was last year. I think if something was really the wild card of 2011, it was the collapse in the currency. There are structural reasons why the Indian currency is weaker than many other currencies - we know about the current account deficit and high inflation rate. If you look at the current account deficit, the trend which is very clear is that most of the currencies which were weak during this June to December 2011 period have a high structural current account deficit. So in a sense, the trend that we have seen in the rupee is not just unique to the rupee, it's a trend which has played out among several other emerging market currencies which have a large current account deficit.
Now thatís no consolation to me if I am a dollar based investor. I think the issue is in the European region in terms of the eurozone and the ability of European banks or for that matter other banks to access dollar funding over there has had a negative impact on countries which are dependent on dollar surplus has been recycled over here to fund that deficits.
So I am hoping that as far as 2012 will be, currency is not going to be a wild card. My sense is that a 20% move on the currency is really a big move and something will have to go terribly wrong for it to repeat the kind of move. So my bet is that currency will not really play such a big role this year as it did in 2011.
Q: On your point about the market being a leading indicator of an eventual economic upturn, do you think at some point in 2012 we can restart a trend as some of these problems or headwinds start receding or do you think itís more likely that we get a strong cyclical pullback rally of 20% plus, but that begins to fade even as we go towards the end of the year on a recognition that things will remain subdued for a whole lot longer?
A: The only signal we have got from the market is the slowdown signal because of the selloff in 2011. As we are clearly seeing, the economy data is clearly headed south and even earnings data has headed south. Yes, you are right in some senses even a market rally sometime in 2012 maybe treated more as a head trip by the market than by a sign that things are turning around for real. My sense is that it is going to be a grind and therefore to really expect that somebody will magically toss a coin and things will turn around a dime, thatís not going to happen. More and more it looks like somewhere in 2007 we have started a long consolidation process very much like the late 90s.
The good news is that we are three years into it. The bad news is that if you go back to past history, the market has taken three to six years to work its way through that morass. If you are a long-term investor, we need to keep in mind that these two things always go hand in hand. So cheap valuations and terrible headline news go together just as expensive valuations and great headline news go together. So if you are a long-term investor, then you need to be looking at these valuations as opportunities.
But itís certainly for the long-term; itís not something thatís going to benefit you in six months, or twelve months. If you got a three year view or five year view, then I think you need to take advantage of the current situation where valuations are starting to look reasonable. Very importantly, expectations are continuously getting marked down. Itís more likely that you will make money when you buy stocks when expectations are low, then when you buy when expectations are very high. So thatís my limited point in terms of the fact that at some point I think you will start to see the market do much better.
Q: In that context, how much would you hold out for the union budget this time? A lot of last years figures have basically been thrown out of the window. What do you think the market should or could expect this time around?
A: The focus is going to be more in terms of where they will be able to peg next yearís fiscal deficit. I think this yearís over shoot is now given; we know that it's more or less Rs 1 lakh crore. But halting the number at that level is going to be the big challenge. If you look at our past history during the late 90ís going up to 2003-2004 where India went through a significant fiscal correction in the fiscal deficit contracted, it's not that we made the fiscal deficit contract in absolute terms, it's just that we managed to stabilize the fiscal deficit or stabilize the growth in fiscal deficit. Then, as the economy accelerated or grew at high nominal rates of growth, the size of the problem started to contract and that is really the only way out for us.
I donít expect big bang announcements to try and cut the subsidy bills very aggressively, but even if they can cap it at such levels, growth will do it's bit in terms of working away the size of the problem over a three-five year period. If the economy grows at nominal terms even at about 12% in six years, the economy would double in size. Therefore, if you kept the fiscal deficit flat in absolute terms for a few years, it would effectively come down by a factor of 50% as a percentage of GDP over that same period. So thatís really what we need to work on. I donít really expect anything very dramatic in terms of our ability to slash the deficit. But just keep it caped, over 3-5 years weíll work our way through it.
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