‘Wealth-creating opportunities are likely to arise from consumption theme’

Consumption accounts for a significant portion of India’s GDP. With the favourable demographic of a young population and rising per capita income, we believe the broader consumption theme is likely to deliver growth from a longer-term perspective and is the structural story of India, Chockalingam Narayanan, Head, Research, BNP Paribas Mutual Fund, said in an interview to Moneycontrol’s Kshitij Anand.

Edited excerpts:

Q) What is the big worry for global investors? And, do you think the inversion of yield curve hints at a possible recession?

A) Global investors, particularly those from developed markets, have historically been observing that whenever recessions have happened, on most of those occasions, the yield curve inverted about 12 to 18 months prior.

Currently, we are observing the inversion of the yield curve in the US and that is obviously raising concerns about a possible recession coming in a year or a two.

Will this relationship hold or not, tough to say. What is observed is the fact that the demand is still growing, albeit at a slower rate.

Trade tensions, in that sense, have not resulted in a loss of demand entirely but more to do with the shifting of the sourcing to alternate locations, either to home market or alternate global locations. This is comforting.

With regards to India, our economy now is definitely more aligned to the global supply chain than what it was said a decade or two ago.

In that sense, there will be some sort of impact. However, the inherent domestic factors and the growing middle class does provide some structural support and should help offset the impact.

Q) How did India Inc fare in the June quarter? Do you see a muted September quarter as well?

A) The quarterly results have been insipid and have disappointed both on revenues and on earnings growth. The economic slowdown hasn’t been broad-based and we believe there are still sub-sectors in the economy which are doing well than the headline number.

Financials led by select private retail banks and insurance, and consumer-related sectors such paints, value retailing, urban staples and select consumer durables did well.

We believe that companies which have been better bottom-up executors have fairly done well in these testing times. The automobile sector was badly hit by weak demand, high regulatory costs, and liquidity tightness.

The telecom sector has been impacted by high competitive intensity. Earnings growth misses were also seen for public sector banks, levered non-banking financial companies, and capital goods companies.

It is difficult to say how the immediate quarter would be like, but the rest depends on how the festive season pans out. The improvement in the monsoon coverage and some of the recent steps by the government and the RBI towards improving funding availability could help to some extent.

Some countercyclical measures, if brought in by the government, could also help in demand recovery; else one will have to wait for the underlying economic activity cycle to start kicking back.

Q) Foreign institutional investors (FIIs) have been pulling out money from Indian markets since July, while mutual funds absorbed most of that selling. Do you think the momentum will continue? More FII selling till December 2019?

A) The foreign investors’ move, in the country, has largely been led by the stability of the various pillars of the economy (legislature– stable government with the majority; judiciary – functioning legal system and executive) and the superior growth opportunity that it offers.

We believe the recent sell-offs have been on account of global moves in emerging market flows and the lack of much needed fiscal stimulus in budget domestically.

However, over the long term, foreign investors’ exposure to the country has been steadily going up. While the structural story for India remains intact, the earnings and cash flow growth has been below par and this can potentially result in some of the historical valuation premium compared to emerging markets peers coming down.

Our sense is that whenever there is some improvement on the earnings and cash flow front, we could see foreign investors coming back, aside from global factors like flow towards emerging markets.

Q) With global recession looming large, gold is all set to scale Mount 40K on MCX. Do you think it is time to invest in gold or gold exchange-traded funds (ETFs)?

A) We broadly believe that gold price appreciation is a function of the difference between inflation and interest rates and perceived risks in alternate investment products.

While we do not understand everything about gold but in some limited sense, we do notice that globally, one is seeing a risk-off trade as well as a result of a large number of treasuries trading at a negative yield.

These factors have led to a sudden surge in international gold prices and the recent changes in customs duty on gold has led to a move in the local gold prices at a level higher than what one has seen globally as well.

Difficult to say if one can see a further move. But, as far as India is concerned, we do see positive real interest rates and to that extent do not see financial savings looking at gold as an alternative in a big way.

Q) The automobile sector has been under pressure, with more firms opting for shutdowns. Do you think this sector could produce wealth creators if someone buys the stocks at current levels with a time frame of two-three years?

A) Auto companies have traditionally been large wealth creators in India given their established global scale business models in two-wheelers and small cars.

This is now getting questioned under the quest for adoption of electric vehicles (EVs) and simultaneous investment towards improved emission regulations for internal combustion (IC) engine-based models.

While one may hazard their own guesses towards the pace of EV adoption and related factors, these uncertainties have definitely resulted on the demand side of the equation, which also is getting impacted by slower GDP growth-related factors as well as what choice is to be made if they were to buy.

In this uncertainty, the increased convenience and ease of transacting in the used car market has led to some demand shift to that market. For a revival in demand for new cars, we need a combination of self-help (OEMs doing their bit to create excitement), policy support through the much sought after counter-cyclical measures (a challenge given government focus on fiscal deficit target) as well as improved support for auto ancillaries and dealers from the financial sector.

The good part is many OEM (original equipment manufacturers) companies seem to have healthy balance sheets and they may have to use it to some extent for the above reasons and to capture their fair share of the market when the industry moves into the adoption of newer technologies.

Structural story of aspiring young population and high growth economy could lead to demand for both passenger and commercial vehicles in the longer term.

Q) What is your perspective on the consumption slowdown? How will it affect the mutual funds industry in India? How is your fund performing?

A) As stated earlier, the current economic slowdown hasn’t been broad-based and we believe there are still some sections of the economy doing well than the headline number.

High-ticket consumption backed by leveraged consumption, however, has seen some moderation and that could take some time to recover. At the same time, we have seen a value for money business models doing well across a host of sectors like consumer durables, paints, apparel retailers, grocery retailers, urban consumer staples, etc.

Even for that matter, some agriculture-oriented sectors like pipes did reasonably well.

The consumption funds typically are classified as a proxy of consumer staples and discretionary sector.

Unlike popular belief, our consumption strategy focusses on leveraging upon the broader “consumption theme” that India seems to be currently witnessing.

We consider businesses which interact directly with their consumers, i.e., following primarily a B2C (business-to-consumer) model. So we don’t restrict ourselves to staples or a discretionary sector but explore opportunities in cement, retail banks, real estate, telecom, healthcare services, hotels, transportation, and other related industries.

This approach has worked in favour of us even in the current cyclical consumption slowdown phase. Consumption being a significant portion of GDP and with the favourable demographics of young population and rising per capita incomes, we believe the broader consumption theme is likely to deliver growth from a longer-term perspective and is the structural story of India. Hence, this space could throw a lot of opportunities for long term investing.

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