Global worries loom; FIIs to be net sellers in 2016 too: CS

The domestic economy is beginning to do well, but there are lots of worrying signs in global markets which could affect India, feels Neelkanth Mishra, Head of Equity Strategy India, Credit Suisse. He expects foreign institutional investors to be net sellers in 2016 as well.In an interview with CNBC-TV18, Mishra says global linkages are the biggest concerns for listed companies. Around 53 percent of the aggregate revenues of the top BSE 100 companies come from outside India, he says.Iron ore staying below USD 40/tonne will hurt metal companies in India, he says.On the positive side, Mishra says the Seventh Pay Commission is expected to act as a stimulus for the economy and he is hopeful of the rural economy improving in  the coming year. He is also bullish on the prospects for real estate in mid tier cities, and expects demand for infrastructure to pick up in 2016.Mishra is positive on fast moving consumer goods (FMCG) companies and non-banking financial companies (NBFCs), and says cement appears the only weak sign in the domestic economy.Below is the verbatim transcript of Neelkanth Mishra's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: What does it look like? It has not been a very fruitful year as far as the Nifty performance is concerned or as far as foreign institutional investors (FII) flows are concerned. Is there reason to believe that now they have reached value levels and 2016 will be better for the big stocks?A: Not really. I think that the global linkages are the biggest concern. We are very worried about what is happening abroad and unfortunately, the larger listed stocks are also much more linked to the world than they are to India.So, 53 percent of BSE 100 revenues are not linked to India at all. Even the remaining 47 percent are our favourite banks where because of a negative wholesale price index (WPI), credit growth has been suffering. There is also a concern of non-performing assets (NPA) from the metals exposure. So, the BSE 100 is actually to a large extent not linked to India.There are very worrying signs abroad if you see the junk bond market, there are signs of liquidity stress coming up, commodity prices if they fall below a point like if you see the bond yields of some large metal companies, they are signalling massive stress and if iron ore stays below USD 40 per tonne, copper goes down even further, aluminium falls, these are risks, some concerns that China possibly slows down further next year.Of course there is also the FII flows that you mentioned. I think the source of FII inflows in 2011-2012, 2012-2013, when our economy was going through a very bad phase was the surplus savings from the sovereign wealth funds. Now that oil prices are below USD 40 per barrel, they are redeeming these investments.If you have action and reaction very close, you get a causal relationship drawn. So, oil prices fell to USD 40 per barrel, we saw selling. The problem with this kind of selling is that it happens with a lag. So, you have the oil prices falling to USD 40 per barrel now,  some bureaucrat in some West-Asian economy will go and tell the head of the Sovereign Wealth Funds (SWF), we need USD 15 billion more in January or February and then they send their redemption requests to all the funds and then funds come and start selling.And here because it is like Rahu-Ketu kind of analysis, why are FII selling, it must be because the government did something and put a raid on someone, people start cooking up reasons. But the real reason is that the surpluses are shifting and they are shifting to economies which will invest through FDI and bond markets. So, Germany, Taiwan, Japan, Korea, China, these are economies that either invest through foreign direct investors (FDI) or through the bond markets, through pension and insurance funds. So equity outflows from the FIIs will persist in 2016 as well.Sonia: You spoke about the global worries, but even locally nothing seems to be picking up - earnings are not improving, rural sentiment continues to remain very low. Do you see any pick-up in activity locally?A: Absolutely, I think the local economy is doing well. Let me address both of these concerned and I think they are genuine concerns, but if you split the BSE 100 earnings and how they have moved over the past year, most of the cuts have happened in the global focus sectors. So, you have seen metals, energy, an auto company with a large global exposure, these are companies which have seen brutal cuts. Therefore the BSE 100 forward integer has not moved at all.If you look at the farmer -- the agricultural economy -- the farmer, more than the industry, is linked to what is happening globally. So everything from milk prices to corn prices to cotton, soya, rubber, even types of wheat and rice, these are linked to what is happening globally. That is the reason why the small part that remains of agriculture in the rural economy -- less than a fourth of the real economy is now agriculture -- that is under severe distress.So, you are seeing volume declines because of the bad monsoon and the hailstorm in the rabi season, the rabi sowing is still rather weak. It has improved a bit, but it is still pretty weak. So there are bad volumes and bad prices.However, despite that there are some very welcome and heartening signs in the economy. So, we are seeing very robust auto sales, we are seeing very robust oil sales, the three month moving average on oil sales is the highest we have seen in a decade. So, these are very heartening signs.The only weak sign right now is cement but otherwise the indicators which indicate hard activity are all flashing green in my view.That is the reason why if you split the BSE 500 into the next 400 and the BSE 100, the BSE 100 has done very badly, the next 400 are up. So, if you add the market cap of the next 400, they are up over the last 12 months. Partly because they have not seen FII selling, but partly also because they are far more exposed to the domestic economy than they are exposed to the global economy.Latha: In that case, what kind of stocks will you play? Should you not be positive on NBFCs which lend largely to these kinds of companies?A: Absolutely, so we have been very constructive on NBFCs. There are some that are looking a bit stretched. However, yes, that is one sector where there should be persistent growth. They are also stepping in where the banks are letting go because of the concerns around bad loans. There is also consumption and I think in the next year, if you recall the early part of 2015, we had seen the government go through very acute fiscal consolidation. Last minute kind of crunch on spending.The bigger thing happened away from the public eye at the state government level. There was even worse consolidation forced on the state government because the centre just had no cash to send.Now what we are going to see in the next three-four months is a very bad base. So this year, the receipts of the government, if you look at percentage in the first seven months, as a percentage of full year targets, we are third based in 17 years. So the deficit numbers -- I am sure you are well aware -- are quite healthy compared to where they usually are at this time of the year. That means that the need to consolidate at that pace doesn’t exist. So February, March, April and May, the year-on-year (Y-o-Y) numbers will look exceptionally good.From June onwards as the Pay Commission hits, you will see -- this acts like a stimulus, of course there is someone who is paying for it and it could be everyone who is not in the government who pays for it and then we can discuss how. However, the point is that in an economy where there is a lot of slack, slack in labour because tier-III and tier-IV real estate markets are completely focused on the Pay Commission. So the reason why the smaller towns are seeing weak real estate markets is because of the Sixth Pay Commission effects are faded because if you see 50 percent of central government employment is in cities outside the top100.If you add the pensioners and if you add the state government employees which are three times a number then they are almost always away from the big cities. These are railway townships, these are areas where you have a tax administrators, land record administrators and these economies only see big cash infusion during the Pay Commission. Given that most government employees are in the top quarter of consumers, even the bottommost will be in the top quarter of consumers which is perhaps why you see three lakh applicants for 300 jobs because it gives you a lot of security and good consumption, the incremental spend is always on the cars and housing and jewellery and processed foods.Sonia: You are making a reference to the cement space and how it hasn’t recovered. That is a serious problem because the latest we hear is that there is even more correction in cement prices and it is very pronounced in the northern region. You have been bullish on stocks like Ultratech Cement etc. How much longer do you think we will have to wait for a recovery in that space?A: There are two aspects there. First is that, there is infrastructure and there is housing and housing you can break down into urban housing and rural housing. On the infrastructure side, I think the pickup in government spending that we have seen when the downstream effects -- the government starts spending acquires land, gives away the contracts, digging starts and then a couple of months later, the cement demand starts to move up. So that activity we will see. Railways station modernisation projects, activity will pick up. So on the infrastructure side the demand should start to improve in the new year.Next year's base is very bad. So if you remember, March quarter was horrible, June was horrible as well. So we should see slightly better numbers.On the housing side, the rural housing what we need for that to pick up is better agri-commodity prices. So if cotton prices were to improve from here, if sugar prices continue to improve from here, if we see soya, rubber, corn, wheat prices and unlike what is happening in iron ore or copper, where I can try to convince you that this will last for four-five years, on agri-commodities that is unlikely to happen.So it is very clear that I think in the New Year, the rural agri-commodity price improvement should provide more comfort to the farmer and that is very important.The urban side, we all keep obsessing about Lower Parel and Gurgaon real estate but that is not very big consumer for cement right? But it is the cities outside the top100 where a large part of the population lives. That is where when the real estate market picks up and that could be in second half next year.Latha: What stocks then? Normally the FMCG stocks will benefit but they are all above 40 times already?A: There are several.Latha: FMCG would be your pick, is it?A: FMCG and even discretionary because eventually it is new home construction, there is switchgear, the electrical appliances, all of those things start to benefit. While we are not particularly constructive on jewellery because of what is happening to gold but if you see the consumption behaviour, gold purchases go up very sharply. So those are things that can benefit as well. Entertainment -- so what you find is that the spend on cable TV picks up very sharply.