Demonetisation will be positive for medium to long-term. However, in the short term the impact can be seen on daily wagers who probably are getting shifted to the brink of below poverty line, says Sridhar Sivaram, investment director at Enam Holdings.
Demonetisation will be positive for medium to long-term. However, in the short term the impact can be seen on daily-wage worker who probably are now in danger of going below the poverty line, says Sridhar Sivaram, investment director at Enam Holdings.
He says the near-term looks patchy as the cash cleanup is an event which market veterans have never seen before and it is difficult to analyse. There will be demand destruction as some buying was coming from the black economy.
He said the government will gain from this currency ban and make Rs 2-3 lakh crore.
He also said the government needs to give fiscal stimulus by drastically cutting down petrol prices by Rs 5 because this is an unprecedented event. This will give a boost to the economy.
He further said the government should not worry about the fiscal deficit for this year and should focus on reviving the economy faster.
On building a portfolio, Sivaram said the concern in this market is that the earnings expectation is too high.
"Pre-demonetisation, the current fiscal year expectation was 15 percent in earnings and 18 percent on top of that for next year. We were expecting 7-8 percent growth for this year and possibly 10-12 percent for next year. The best way to build a portfolio was bottom-up. That was our startegy and we still keep that," said Sivaram.
He remains positive on PSU banks post the currency ban.
The bitter boardroom battle between Ratan Tata and Cyrus Mistry is confusing the investors whether to invest in Tata companies or not.
Sivaram says that most investors will take a judgement call related to Tata Group.
Below is the verbatim transcript of Sridhar Sivaram’s interview to Latha Venkatesh, Anuj Singhal & Sonia Shenoy.
Latha: How do you handle this demonetisation as a stock market investor? Steer clear of buying or selling at this juncture?
A: This is an event which so many of us who have been in the market for so many years haven't seen anything like this and this year in particular we have had many of these events starting from Brexit to unexpected victory of Trump and now this. So, there is no precedent to this and it is everybody's own guess on how you analyse this. So, it is reasonably clear that on a medium to long-term this is very positive because the black money in the system will go down if not completely get eradicated. Tax to gross domestic product (GDP) over a period will go up because we are really talking about stock not the flow because the cash will come back into the system, everybody will do the business the way they were doing. It will take some time for them to generate the black money but in general the disclosure levels will surely go up. So, these are the positives from the medium-term.
The negatives in the short-term is we don't know what is happening because businesses have stopped and my concern is not on the immediate business stopping but the second derivative impact. Like if paints are not selling, the guy who is actually painting, he doesn't have the daily wage. So, he is going from the brink of poverty to below poverty. So, those are the issues, it is very difficult for anybody to fathom and to analyse and take a calculated guess on how this will play out. I just gave one example. There are hundreds like this, truck drivers, or an auto rickshaw driver, it can just go on.
The only thing is that as we speak things have improved a lot. Over the last 2-3 days I have gone into the market, things have really improved; people are giving Rs 100 notes back. So, this is city. I don't know how it is in the rural and in the small town. So, I really can't extrapolate this. So, that is the short-term pain but surely over the medium to long-term this will have significant impact and of course there is a lot written about the gain that the government will make, how much it will be, whether Reserve Bank of India (RBI) can pass it or not time will tell but surely 2-3 trillion is what is expected the government can make and that can be utilised over a period of time.
Anuj: But in the near term there are some people calling for doomsday scenario, some calling for de-growth as well in the economy. Do you see risk of that and if that is the case do you see more pain in the near term for the market?
A: It is possible. It is very difficult to predict with the very near term because we are hearing numbers that sales have fallen by 50 percent; sales have fallen by 60 percent. The question is how fast this does -- it is just two weeks now since demonetisation and we are seeing some improvement -- he question is how fast this stabilises and we assume that one quarter is a write off and maybe even the next quarter is more or less a write off. The question is can we come back to even 70 percent of previous starting next year and then we move forward. There will be some demand destruction because some of the demand was coming due to the black economy. So, it will take time for it to come back into the system. So, even next year is going to be tough. So, if structurally we think about it this is positive. Yes, near term it is very patchy, really very difficult to analyse.
Sonia: From market's point of view what impact do you think this could have on the fiscal because higher disclosure should lead to increase tax collection. But on the other hand if the economy slows down markedly then that could hamper tax growth. So, do you think it would become tough for the government to meet that FY17 fiscal deficit target?
A: My view is slightly counterintuitive. I think the government needs to give a fiscal stimulus right now because this is an unprecedented event and we know that the economy is slowing down. Fortunately for us the inflation numbers are quite benign and we are going to fall further. So, we do expect a 50 bps cut coming in December from RBI combined that with a fiscal stimulus, whichever way, you cut excise duty, petrol prices have to be drastically cut by Rs 5 or something like that to just give a booster to the economy because we are seeing a shock and you need something to neutralise it. It will have some impact on fiscal for this year but it is highly probably that some part of it is mitigated by one-off gains. So, these are calculated risks the government has to take. I am sure even they didn't anticipate these sort of reactions but I would really hope that they act together, which is the monetary and the fiscal, acts together and not be so bothered about the fiscal deficit for the rest of this year because you will get some one-off gains next year and if you can revive this economy faster than just allowing it to revive the way it is which is slow and steady. It may be a bit too late. As I said it is a counterintuitive way of thinking that you actually increase the fiscal to get over this problem.
Latha: You are actually part of a fairly large group of people that believe that fiscal stimulus should come. What is different in what you are saying is that a lot of people were hoping for a large investment by the government if it got a large dividend or some such one-offs. But we had a Credit Suisse report which said that government appears to have lost its ability to spend. Road contracts after coming in thick and fast have started petering out. The bandwidth of the government to spend right down to the last bureaucrat has weakened according to that report. So, if it comes in the form of petrol price cuts then that is more market oriented and consumption oriented.
A: That is the easiest way of transferring wealth because the guy who uses a tractor to an auto rickshaw driver to a middle class family everybody benefits. And it flows immediately. You cut Rs 5 the entire economy benefits day one. There is nothing better than that because they have created a war chest because they have actually increased it, they have increased at least Rs 16 or 17 absolute over the last two years, so they have some cushion. It will lead to some strain on fiscal but these are times where even the rating agencies would take cognisance of that because India has had significant improvement in macro and we have not seen any change in the rating agencies stance. So, I don't see because of this and if the fiscal goes up a bit knowing fully that you do have one off gains next year which can offset this is something which the rating agency should take cognisance, this is my guess, I don't have any reach to them.
For entire interview, watch accompanying video.
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