Exclusive: Nomura's Saion Mukherjee on why euphoria surrounding private capex revival may be misplaced

Nomura Securities India is taking a more contrarian view on the Indian equity market than many of its peers. The foreign brokerage sees volatility in the market rising while challenging the market’s perception that the recent upswing in corporate earnings will last for many years to come.

In an interview with Moneycontrol, Saion Mukherjee, managing director and head of equity research, India, suggested that enthusiasm around private capex revival is getting euphoric while making a case for the government to focus on reviving the consumption economy in the upcoming Budget.

There is no denying that liquidity support has been very strong for the Indian market. At the margin, this liquidity support can wane as we go forward. There could be a faster pace of quantitative tightening and that could have a negative effect on risk assets in general. I think flows to domestic equities could get impacted because you have other avenues where you can invest. Also, stagnation or low returns in the market could further dampen local flows.

The other factor is about growth. Today, in the economic data we are seeing a lot of noise. Recovery in growth is obviously there from the bottom, but the same in consumption and services is materially lower than the pre-pandemic trend. Consumer confidence remains weak, which makes us wonder how growth is going to play out beyond the pandemic. So I am not even taking into account any meaningful impact of the ongoing third wave or subsequent waves of the pandemic, but even without that, there is scarring that has happened to the economy. People say that earnings have been strong and yes they have been but at some point earnings growth will be increasingly dependent on what the broader economy does. So we may see a situation of earnings slowing down going ahead and that’s when the market could react negatively.

RBI has been cautious as it wants to support growth given that inflation numbers have been manageable so far. Earlier, our team was thinking that rate hikes could start as soon as February but because of Omicron this may get pushed out since there could be some lingering growth concerns. Nonetheless, we are penciling almost a 100 basis point increase in the policy rate in 2022. At some point, the Indian central bank will also look towards fighting inflation.

I hope so. It looks like consumption is lagging behind and therefore there is some sort of support required in the Budget. Of course, as you know, there are measures that can be taken outside the Budget too but there is merit in thinking that we may see more consumption support from the Budget. At the same time, we need to keep in mind that the deficit is running high. Given the higher revenue collections, it may be possible to maintain the fiscal deficit target this year. I think if the economy does well and the tax buoyancy remains, I think then there could be a possibility of providing a boost to consumption – that seems to be one way to stall the potential slowdown in the economy. So one can expect that, but let’s see how the Budget comes through.

Our 2022 Nifty 50 target of 18,150 has limited upside from here. We are expecting a flattish year and there can be bouts of volatility wherein you could see some correction going forward. Waning liquidity could have an impact on flows which could in turn have an impact on valuations; so that kind of spiral can happen in the market just like the rally we have seen so far. We are in an unprecedented territory given the expansion in the balance sheet of central banks, and now we are talking about a contraction in the balance sheet by the US Fed starting July or August. Take inflation, you saw how quickly the assessment has changed by global central banks. So things can change extremely fast because we are in an unprecedented situation. That’s the reason why we are sort of cautious on the Indian market.

Investment-led growth seems to be the policy thrust. You have ongoing investment in infrastructure about which we feel very comfortable as there is a pipeline of projects and funding is taking place.

But against the backdrop of muted consumption demand and the pandemic, I think it will be very optimistic to say that there is a strong revival in general private sector capex. I would say that there is a thrust towards a policy that is supportive of capex but I think we need to be a bit more patient in terms of when this is actually going to play out. If you look at capacity utilisation rates, they are not very high. What we are seeing is that companies are doing capex around digitisation and automation rather than increasing their capacity, so it’s a different nature of capex that is happening. I think there is an element of euphoria around capex revival, but it will not be as swift as some market participants believe.