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Last Updated : Sep 25, 2020 01:07 PM IST | Source: Moneycontrol.com

Unwinding of 'Globalisation Era', 100% jump in global debt are the biggest risks to growth

The US election is not a risk rather it may be an opportunity for global investors to enter the market at an appropriate time, says Amit Jain of Ashika Wealth Advisors.

Sunil Shankar Matkar

Globalisation, as we know it, is probably in reverse gear and global entrepreneurs need to align their business models with this harsh reality if they wish to survive in this new era of "deglobalisation or de-dollarisation", Amit Jain, Co-founder & CEO at Ashika Wealth Advisors, says in an interview to Moneycontrol's Sunil Shankar Matkar. Edited excerpts:

Q: Do you expect more inflows in smallcaps and midcaps after Sebi tweaked the norms for multicap funds? What could be the reason behind it and do you expect more such changes from Sebi?

Yes, we believe after the new SEBI guidelines on multicap funds allocation, we may see an increased flow of liquidity in midcap and smallcap stocks. Also, a major reason behind this possible upmove may be undervaluation of midcaps stocks compared to largecap stocks at this point of time. As of now, midcap stocks are trading much below their valuations compared to December 2017, when the midcap index P/E was close to 106 due to a very high inflow of money in mutual funds after the demonetisation period. However, today this P/E ratio is close to 35. So in our view, this additional liquidity may create a rally in midcap stocks. However, at this point, keeping an eye on current geopolitical tension, the risk-reward ratio may not be very favourable for conservative investors.


Q: Do you think we will report better economic growth in FY22 given the measures taken by the government and current economic data points?

Yes, on the economic front, the Indian economy may be doing much better in FY 2021-22 compared to the current financial year and there may be four major reasons for this outperformance. One, post COVID-19 vaccine, which is expected by January 2021, the Indian economy may start operating at least at 90 percent of pre-COVID operating capacity. Two, due to extremely bad GDP performance in the current FY, which may be close to -9 percent, for the next year, we may have a much lower base to compare our growth with. Three, during the next financial year we may have a lot of pent-up demand coming back in the market once the global economic environment improves. Four, the measures taken by the government to revive the economy may start reflecting in GDP numbers of FY 2021-22.

Q: Do you think the US elections are a major risk for India? What are the other risks that can hamper growth?

In our view, the US election is not a risk rather it may be an opportunity for global investors to enter the market at an appropriate entry point. From now to the US elections, global markets may be volatile, which may create much better entry points in markets for the medium term. In our view, the biggest global risk is the unwinding of an 'Era of Globalisation', which we have been living with since 2001. We all are accustomed to this 'Globalisation', which may be in reverse gear in the ongoing decade of 2030. Global entrepreneurs need to align their business models with this harsh reality if they wish to survive in this new era of 'Deglobalisation' or 'De-dollarisation'. Also, another risk is a 100 percent jump in global debt to $270 trillion, which is a major worry for global central banks and governments. On May 23, we advised exit from the dollar and since then the dollar index is down almost 10 percent from the peak. We may see a temporary bounce back in the dollar, but in our view, it may drop by -40 percent of its value by the year 2035. This decline in the US dollar and the US economy may have a long-term negative impact on the global financial system of fiat currency.

Q: What is your take on the banking sector, especially after the end of the moratorium period and expected NPA issues?

Today India's banking sector loan book is close to Rs 105 lakh crore, out of which 9 percent to 13 percent has exposure to the sectors whose business model has become unviable in the last 13 years. Most of these sectors are from asset-heavy business models' like infrastructure, real estate, energy and related sectors. In the last six years of a prolonged slowdown, a lot of companies from these sectors turned into a liability-heavy business model. Now post COVID, these sectors may see further pain points.

Hence in our view, this may be an overhanging sword on the entire Indian banking system. We have already seen Yes Bank and cooperative banks going bust due to the above-mentioned challenges. Hence, investors need to be very cautious. To share a broader view, the entire banking sector has a capital of Rs 11 to 12 lakh crore, if above mentioned risky sectors have 40 percent NPAs, then half of the banking sector capital shall be wiped out. Keeping this risk in mind, we are seeing that all major banks like ICICI Bank are raising capital to cover the risk of increased NPAs.

Q: With the government initiating several measures to shore up the economy, do you expect more FPIs/FDI to come into India?

In our view, both FPI & FDI will continue to increase their allocation to Indian businesses due to TINA (there is no alternative) factors. As of now, if global funds and businesses need to invest, they have very few preferred locations like India, Africa, Vietnam, Taiwan and Mexico. Even among all these countries, India has a much better demographic yield to set up large manufacturing units and investment in infrastructure business opportunities compared to its peers. Also, in the current geopolitical equation, the world is talking about 'economic distancing' from China, which may be very beneficial for the Indian economy in the medium to long term.

Q: Most experts say a correction is due given the expensive valuations. Do you expect a 5-10 percent kind of correction or are markets waiting for the US elections?

Yes, if you analyse data, in the short term markets are always either overbought or oversold. For example, at the beginning of January 2020, the market was overbought but investors were not willing to exit. On the contrary, on March 23, the market was oversold but no one wanted to enter due to excessive media-created fear. However, in the long run, the market always attains an equilibrium point. At this point in time, markets look expensive and may have very limited upside from hereon, so we believe there is a correction on the cards. Also, increased geopolitical tension may add further fuel to this possibility of a downside risk.

Q: Do you think the IT sector will be a star performer over the next few years?

We have been bullish on this sector for almost a year, as, in our view, the next industrial revolution shall be from automation and artificial intelligence, which is a subset of the IT sector. In the last six months, this sector has already generated an absolute ROI of more than 70 percent, which is a bazooka for investors who entered at the right entry point, when there was a virus in the market. However, at this point, we believe and also shared in my previous article that, globally IT stocks are in a bubble range, hence only long-term investors should invest in this sector at current valuation, that too in a staggered manner.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are his own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Sep 25, 2020 01:07 pm