The next year-2016- will be watershed year in terms of economy and markets, believes Nandan Chakraborty, managing director- institutional equity research, Axis Capital.
In an interview to CNBC-TV18, Chakraborty says 2014 was a sweet spot in terms of a new stable regime, falling crude prices, etc but 2015 is unlikely to see any growth in terms of capex or jobs.
However, the stability and the real effect of the new government’s policies will be in full swing in 2016 and it will benefit from the positive sentiment surrounding the government’s economic measures.
What is also likely to aid the economy is significant flows from US, Europe and Japan, he further adds.
“So long as the US and Europe continue to grow, they will keep pumping money. Similarly, I expect the Bank of Japan to continue spewing liquidity, so capital is not going to be a problem at all,” he adds.
On sectoral picks, Chakraborty says engineering, procurement and construction (EPC) businesses are likely to see maximum gains while US growth related sectors, like pharma and IT will rally the earliest, but not the most.Below is the verbatim transcript of Nandan Chakraborty's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: What are you expecting from the Budget? What can fire up the markets you think?
A: People have to know that this is a regime which is stable and therefore some the retro tax measure and so on, those I think that they should be given some comfort that things will not be arbitrary and people will not recap the past, that is as far as the foreign institutional investor (FIIs) are the concerned. As far as the domestic policy is concerned, what is extremely important is the fiscal math is credible.
There is a little bump up of the gross domestic product (GDP) figures because of the change of the base year in February but apart from that in general the fiscal math should be credible because rating agencies, FIIs even the RBI in terms of its rate cut – the next 25 bps cut is expected only after the Budget, that is the second thing. The third is a little bit difficult to enunciate because what I would really hope for is timelines on goods service tax (GST) but that is a little too early for that.
What happened was, last Budget there was not too much of a statement maybe rightly so. So, this year I think people would expect some sort of statements in terms of administration. We are aware that the government wants to keep administrative expectations low and actually show what they are doing rather than talk about what they are doing; I think that is a fairly good strategy. However, something in terms of these steps, these are the three main things that I would look at from the Budget.
Latha: The Nifty has gained substantial ground, what are you looking at in terms of Nifty gains, index gains in the current year going by the pace of policy changes so far?
A: As I have said earlier also on this channel, Indian politics and Indian economics being good is sort of a necessary condition but the main swing factor is always the globe and this is sort of secondary. We come back to saying that even when our policies were not so good there were a lot of flows and so on. So, that is sort of to an extent proves it.
I think this world is going to be a flush with liquidity because the US Fed is no more the marginal source of liquidity. So, as long as the US grows and as long as Europe and the Bank of Japan continue to spew liquidity, liquidity will not be a problem; that is the first thing.
On the other hand India’s greatest danger today is US dollar spiking. Now that US dollar spiking could happen for whatever reason, it may be due to some oil country Venezuela or it could be some European country having an issue or if US growth is not too good and therefore the world economic forecast will dip, so it could be for whatever reason, if US dollars spikes it is going to hurt us badly. So, that is the danger which I don’t foresee as of now but these things happen.
From what I can forecast I can see that there will be abundant liquidity in the world and therefore the world scenario should be good as far as India is concerned subject to the condition that I mentioned.
Coming back to India, what I would expect from the government, 2014 was India’s sweet spot whether you talk about politics – our honeymoon period, whether you talk about oil, whether you talk about the proximate geopolitics where US troops were still in Afghanistan so there was some amount of restraint and so on; whatever way it was a sweet spot and therefore the turnaround that you saw in the economy was more on a year-on-year (YoY) basis.
2015 you are not going to see any substantial improvement in the output parameters like the cpaex or jobs and so on. You will have to wait for 2016 calendar year for that. If so then what we expect 2015 to be? It is basically 1) the rate trajectory should not be jeopardised, the rate should continue to move down. 2) As we mentioned that the Budget should be non-negative and with fiscal math being fine. 3) The administration should continue because the politics that you are seeing with Rajya Sabha not being allowed to function and neither saying yes or no makes it difficult till middle of 2016 to get something going in terms of the major reforms.
However, there is so much to be done in administration; there is so much capex and ground clearance that can be done in concert with the states. I think administration is the third point that we will look at for 2015.
Sonia: Third point that you mentioned about the administrative steps that the government could take, how do you capitalise on that with respect to individual sectors and themes? Do you continue to play the banks, the autos that did well in the year gone by or do you change your sectoral buys now?
A: I cannot jump to sectors without completing point four because it will be incomplete. So I will have to say that number four is the oil bonanza; it is so important I cannot go to the sectors before that. Number four is how does both the government as well as corporate India use the oil bonanza. What has happened so far is you have just got some part of inventory losses and so on, some part of negative of oil. The real positives of oil you will see only this year onwards, from the current quarter onwards.
Given these four, I will come to your question in terms of sectors. There is a difference between what will move up the most versus what will move the earliest and usually people are confused between the two. So I am making a distinction between the two. Which will go up the most will be whatever is related to capex. So that could be engineering, procurement and construction (EPC) plays, that could be all sorts of capex plays but that could take time, but that could give you the biggest delta.
_PAGEBREAK_
On the other hand what would be the earliest to move but may not give you as much delta could be derivatives of that like banking and so on, for capex and for other reasons also because consumption also has to go up. Number two is US growth plays. So Information Technology (IT), Pharma etc, whoever is dependent on the US. The first one which is basically about the capex plays, I think what is happening is after Larsen & Toubro (L&T) there are just a few players and many of them are highly leveraged and so on.
We have just released a report, just today on the good EPC picks and some of them could be multi-baggers. That is the capex play but you will take time for them to flower. The second is as I mentioned financials which are well known both on the private side as well as the public side and the US growth plays. Oil bonanza is the other one, oil bonanza is something which needs to be played.Sonia: Third point that you mentioned about the administrative steps that the government could take, how do you capitalise on that with respect to individual sectors and themes? Do you continue to play the banks, the autos that did well in the year gone by or do you change your sectoral buys now?
A: I cannot jump to sectors without completing point four because it will be incomplete. So I will have to say that number four is the oil bonanza; it is so important I cannot go to the sectors before that. Number four is how does both the government as well as corporate India use the oil bonanza. What has happened so far is you have just got some part of inventory losses and so on, some part of negative of oil. The real positives of oil you will see only this year onwards, from the current quarter onwards.
Given these four, I will come to your question in terms of sectors. There is a difference between what will move up the most versus what will move the earliest and usually people are confused between the two. So I am making a distinction between the two. Which will go up the most will be whatever is related to capex. So that could be engineering, procurement and construction (EPC) plays, that could be all sorts of capex plays but that could take time, but that could give you the biggest delta.
On the other hand what would be the earliest to move but may not give you as much delta could be derivatives of that like banking and so on, for capex and for other reasons also because consumption also has to go up. Number two is US growth plays. So Information Technology (IT), Pharma etc, whoever is dependent on the US. The first one which is basically about the capex plays, I think what is happening is after Larsen & Toubro (L&T) there are just a few players and many of them are highly leveraged and so on.
We have just released a report, just today on the good EPC picks and some of them could be multi-baggers. That is the capex play but you will take time for them to flower. The second is as I mentioned financials which are well known both on the private side as well as the public side and the US growth plays. Oil bonanza is the other one, oil bonanza is something which needs to be played.
Sonia: One theme that is disappointed is the rural growth theme because over there wage growth has slowed down. We have seen it across companies whether it is Hindustan Unilever (HUL), whether it is Mahindra & Mahindra Financial Services (MMFSL) all are indicating that rural growth is slow. What do you do here?
A: Rural growth will be slow because as I mentioned earlier, 2016 is the year when you will see any output parameters. What has happened today is those lucky few who could anyway buy a car or a scooter but were postponing it due to sentiments bought in the last few months saying happy times are here again etc. However, for what you need for an economy to grow is not the postponable purchases, what you need is grass root number of jobs to go up; number of jobs to go up needs also capex to go up. So that is why I am saying that will happen only in 2016. So, till then it will remain a bit weak.
The second thing that has happened which has not affected India so much but generally globally food prices have crashed, which has been good for us in one sense. Food prices may go up next year because it is a soft commodity but rural will take a little bit time to come up, probably 2016 calendar.
Latha: How do you play the oil theme?
A: Oil theme one part is whoever uses oil, don’t go directly on the oil companies, just go on whoever uses oil. I am not allowed to take names but some of the users of oil and oil products have had inventory losses. So, some of them this quarter will be low and the stock price could go down and so on, things like pipe companies, etc.
Whoever uses oil products, so a lot of that there will be huge bonanzas and also you will have to see if their ability to take prices up or down which depends on competition, just to give you an example, for example for tyres it is always asymmetrical in terms of rubber prices. So, when prices go up they suffer, when prices go down they can’t benefit as much. On the other hand let us say paint companies, it is not so asymmetrical. So, like that if you go through companies you will know which ones gain from oil prices being low.
Sonia: I just had one question on a point you made earlier about the fact that the market will be happy if the fiscal math is credible in this Budget. Can you just elaborate a little bit on that because it looks difficult for this 4.1 percent target for this fiscal to be met? If that is not met then will there be any disappointment or will the market give it a pass if they see certain reforms or certain other initiatives?
A: This 4.1 percent also fortunately a little bit of it will be met because of this base year change where you revise every five years, so, this February the GDP numbers will have into a new series so that little bit of that will be helped by that. Even otherwise administrative large reforms are not expected in the Budget. Even I was a little bit cautious when I said I would expect a GST timeline. So, I don’t think people are expecting that.
People are expecting the fiscal math by itself to be credible and fortunately things like divestment and things like telecom and all that will go through. So, I think it shouldn’t be too much of a problem for the fiscal math as long as the Finance Minister is credible about it.
Latha: Where will the bigger beta come in from the midcap space – logistics or digital companies something on the fringe that has always given the sweetener, where would you put your money?
A: As I mentioned capex. It is clearly capex that will give you the highest beta.
Latha: Will it give in 2015?
A: Yes because PE always goes up before EPS and what happens for capex plays is you get both sales and a margin kick.
Latha: Would cement also be included in that basket?
A: Cement unlikely to give you a very high kick. Cement has been a safe proxy play to capex. As I mentioned it is something that you look at because they are well governed companies, they have low debt but that would be something more like the safer type of plays. I don’t think that will give you high beta.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
