The global economy is in the midst of the "dangerous central bank easing experiment" amid an extended recovery cycle [starting since the 2008 crisis] that could last all the way till 2019. This uncertainty is likely to take a toll on how the equity markets discount the future and will likely reflect in prices, says veteran investment banker Vallabh Bhanshali, Chairman of Enam Securities.
Still, India comes out on tops in all environments, he says in an interview with CNBC-TV18's Udayan Mukherjee.
Bhanshali spoke about his economic and market outlook as well as where he sees opportunity in stocks.
Below is the transcript of Vallabh Bhanshali’s interview with CNBC-TV18's Udayan Mukherjee.
Q: It is an interesting time that I am connecting with you again before a festive occasion. Because by this time one would have thought that the kind of recovery all of us were expecting in India last year that would be seriously under way and we would see some momentum picking up in earnings and growth but unfortunately the kind of results that we are still seeing from the large companies it does not seem that that kind of acceleration and economic growth is still evident on the ground. What would you put it down to?
A: Yes, I buy your point that our optimism was at a different level and the realistic ones also thought that by September we would see more action on the ground. We aren't seeing it and that does cause worry. But why that has happened is not justification but some explanation is that we underestimated the difficulty in the economy. The fact that there is so much leverage on so many company's balance sheets that the banking sector has stressed much beyond what we thought and they have not been able to find solutions, the stress in electricity, the power companies so on. But I am not too worried about it. That is what I would say, but you are right that because of these factors and then we had China scare, we had global scare, we had the Fed holding up rate deceleration in India. The moment Fed said that look, they are not changing fortunately the Governor here took those steps. So, this orchestration has not worked out exactly the way that we would have thought but still haltingly it is working out now.
Q: Why is consumption weak, that is my bigger problem. I take your point about the stress in the banking system and the reason why maybe the capital expenditure (capex) has not picked up to the extent we thought but if you look at the Fast Moving Consumer Goods (FMCG) companies, you look at cement companies also auto companies we are not seeing that kind of galvanization in domestic consumption. Some say it is because of weak monsoon, people have other explanations. Are you disappointed that domestic consumption which was such a strong underpinning for us that also has disappointed to an extent?
A: There are several reasons for this and maybe there is another way to look at it. Over the years I have seen the markets, I have seen the consumption basket, the consumer basket change dramatically. At one point of time you were buying Colgate and we were buying Essel Propack and so on and then from that time to cement to several other products. So, the consumption basket has changed dramatically. So, today you are seeing two wheelers, cars, you are seeing consumption in terms of telecom, you see the e-commerce kind of products, you see apparels. So, lot of good things are happening there.
The big force in the last few years were the rural consumption and it was sustained or it was buoyed by National Rural Employment Guarantee Act (NREGA), it was buoyed by tremendous raise in the Maximum Selling Price (MSPs) of various products and that has taken a breather. So, while there is the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) etc continuing but the pay off both from land sale and greater prices that has taken a back seat.
So, if you take these two or three factors together you will see a better picture of the consumer behaviour. Therefore one does not worry too much that the consumption story of India has kind of halted or got lost somewhere. It is very much on course. It is changing colour and if you see it in that colour there will be less disappointment.
Q: That is an excellent point you make and as someone who has created so much wealth over the years focussing on different consumption baskets because I remember that you played this consumption theme through various aspects, sometimes through media, sometimes through consumption companies and you made the distinction between the changing colour of the consumption basket. From here on if you have to focus on creating wealth playing the consumption theme what comes to the top of your mind as an investor and how to play this now?
A: Just some stray thoughts but as people live well and this story has been played out in many countries that as your Gross Domestic Product (GDP) per capita goes up from USD 1,500 to USD 3,000 the behaviour changes and people want to live better. Therefore consumption of better foods, healthcare, education, travel, leisure and now increasingly the gadgetry, all of that is going to see very good growth and the fact that the e-commerce companies are trying to identify those customers at an early stage, the fact that Alibabas and the Facebooks and the private equities pouring so much money into all those sectors is also a pointer to that trend.
Q: What about the other leg that drives India, which is the investment cycle and that has been a point of concern for the last five or six years. We would have expected that we would have seen the first stirrings of life in that but last week L&T came out and said that they are actually scaling down their order intake projections that they had for the next two or three quarters. What is that telling you about what is holding back serious investments going into the economy today?
A: Firstly the interest rate drop took much longer than one would have thought. One thought that since we had a better policy atmosphere we would get support from this and for good order and good reason it took the time that it did.
The second point is that the balance sheets were quite leveraged and we underestimated that. The other thing was the government took much longer because this particular government wanted to shift the control to the states. I think the coordination between state and centre despite constant refrain has not happened to the extent that one would have desired. Therefore I think it seems the government has become conscious that the leadership will have to be taken by the central government spending and then continue to go and push the states to take more investment decisions. I think that has just started to happen.
If you look at the government spending, the numbers that are coming out, the road sector or railways and defence and some of those areas serious spending has started to happen. So, one hopes that public sector leadership will goad private sector into more investment. However I think it is a serious business and I expect nobody to risk money only in hope. The world is really not that place anymore.
Q: What is your best guess of how long this will take because I remember a lot of very smart professional investors took that plunge maybe three or four quarters back if not longer back that this investment cycle is about to turn. People don't believe it but we do and it is time to put our money to work there - the cyclical sectors, the infrastructure space and now it is testing their patience. What would you tell such people to hold out for how much longer? I know you cannot answer this accurately but what is your best case of how long this switch will take or this turn will take?
A: I may not be able to answer that question at all. However let me attempt, if you see some of the policy action attempted and that action relates to power, to coal auctions and things like that which were kind of one of the snarls that held up a lot more than the average men probably understood and most even professional investors understood. If this proposed action about reforming the distribution companies pain if that goes through and that requires that state and centre work together and just pointed to that difficulty, I think if something like that happens that relieves a lot of pain on the banks. Therefore the banks courage to invest in some of those projects will grow.
The second thing is the Bihar elections are a landmark elections. One way or the other I think the government will have no choice or will have all the freedom either case to move forward on reforms which should create a better atmosphere. I am very cautious and I would like to caution others that we cannot take the investment cycle turning for granted. It will turn because I think the rest of the story in India is absolutely fantastic. On a global basis it is fantastic but to put a time table whether it happens this quarter or next quarter, I think it is difficult.
Q: The Bihar elections, because it is worrying a lot of people. Some say that if the ruling government at the centre comes out on the right side of it, it will get a huge impetus to go forward at a pace at which it is not been able to move since it came into power. The flipside is a lot of people believe that if it does not come out on the right side it may be hamstrung even further, but you have a different spin on it?
A: Yes, I like to think that in case the ruling party in the centre does not win they would see that, well to face 2019 they must perform and to perform they will have to become less politically sensitive and I have seen over the last 25 years that if you are doing the right thing people follow, politics follows. So, maybe this government showed a lot of courage in a lot of things; the land bill and things like that. Maybe a different approach will have to be taken where it is more conciliatory or where you create less friction and find different ways and they are already talking about it. So, irrespective I expect that the reform process to accelerate post Bihar elections.
Q: Since you said that it is serious business and you would advice people to be cautious about investment cycle it is a strange market right now. Anything which has got quality attached to it, the pharmaceutical companies which are delivering, some of the consumer companies are trading at very lofty valuations and the rest of the market is cheap. How do you approach such a market which is so bipolar where the good news is more than adequately priced into some stocks and the rest people do not want to touch or do not have the confidence to just yet?
A: India is a noisy place and we saw that in the period 2004-2009. Infrastructure companies and a certain category of companies really grow extremely fast and you would remember a time when some of these companies had market caps which was greater than several FMCG and so on. Therefore from that fashion led investment cycle to a more confusing cycle we have come to a stage where things are lot more on a steady state basis. You see, virtually one doesn't hear corruption stories and one has seen the deleterious effect of corruption that how much difficulty it has created in the economy in the banking sector and so on. So, as things settle as the world settles, now the world has also become kind of more predictable than it was two or three years ago I expect that India should become more and more centre stage under all scenarios. I have lots of worries on the international fronts but in all scenarios India comes out tops.
Given the fact that the consumption story maybe of a different kind continues investment cycle cannot go to sleep. It will revive at some point in time. Investment in different segments that we are not familiar with is already happening big time. There are some fantastic talks being that I have heard in Delhi about promoting entrepreneurship and innovation. Given all those things I expect that the markets will remain positive. They may not be extremely buoyant that will be dependent on with a lot of international developments but I remain positive about the markets. Therefore your question about what has become extremely rich obviously you can't invest in them. But lot of other stocks will become attractive based on news. I at all points of time every month am able to find something good to look at.
Q: Would that include some of those sectors which people do not want to look at today, sectors like metals which are going through a painful cycle. China is not helping, but valuations on the face of it, even looking at book values look attractive but people don't just have the courage to look at such sectors right now. As a value proposition do you examine such companies or is there too much noise in the global place to be barking up that tree just yet?
A: You read my mind and you goaded me to speak more than I would have liked clearly because this is a very difficult sector. Someone like me or people like us who have been very patient investors we feel very encouraged to look at the quality companies in those sectors because stocks are cheap only when the news is bad. So, you can't have both but I have seen that some time these cycles are very long and the average investor may not have the patience to do that but those who are sure that if you have bought cheap you will benefit they are good places to go to.
Q: Where are we in the cycle speaking of cycles now? Because last year there was a lot of expectation and thought that maybe we started on a five-six year bull cycle because you have seen market move in cycles, we have just come out of maybe a five-six year bad cycle. is this one of those cycles where markets move up steadily and then accelerate in terms of Price-to-Earnings (P/E) multiples as we get towards the later stages or is it a different kind of a cycle this time around. We had a good 2014, we so far had a very average 2015, is this cycle if we can call it that different in some ways?
A: It is different in terms that the world has been a very queer place. It is experimenting maybe dangerously with all this central bank easing. We are seeing a different kind of government and approach to economy and politics and we are coming out of a very difficult period. Therefore markets have been reflecting the difficulty in understanding the projections of the market ahead.
I am not really a great student of cycles as such but it does seem that this is an extended cycle where for the last 25 years one of the major engines of the world is now sputtering and that is China. It has taken a lot of companies and sectors down under it or at least put them in shadow. Plus, for 2008-2015 you had easy money in the US and that is starting to change now. One does not know whether that will ever happen.
So, there were some very macro factors that are kind of changing the rhythm of the cycle. Given that I will not be surprised at all that this is a 'vilambit taal' kind of thing that the bull cycle which normally lasts three to four years the whole cycle turns out this may become a five or six years and it goes to 2019 kind of scenario. So people should be ready for a slowed down world, a slowed down market and just hold their breath.
If you have low interest rates the kind of prospects for markets become theoretically better but if you have interest rates low for long period of time it shows slow investment activity. If the investment activity is slow clearly one realises that the cycle is much longer and therefore it kind of corroborates.Q: This year fixed income has done better for example than equity, interest rates are on their way down which usually leads to some capital gains in fixed income asset classes as well. If you had to position yourself from hereon, what would you do with the relative asset classes - equity, fixed income and may be real estate which is something which Indians have traditionally dabbled with quite a lot?A: All segments look good. Interest rates are still probably in the falling zone, they could fall some more and then of course one should be careful. However in India where you see next 10-20 years growth at least one would not get away from equities. Gold and other assets have now started to look interesting. The international situation is extremely diabolic because the world is now seeing lot more complacence because you think, we have figured it out, if we have any problem we can go back to more quantitative easing because we have so many varieties now around the world. Therefore I worry about the international scenario. Therefore having some exposure 1-5 percent to something like precious metals etc would be useful.Real estate has many shades in many cities and within city segments. Therefore if you are in the lower end of it, I think you are fairly safe because most of the real estate prices have got corrected around the country. Whether they can correct some more is a theoretical thing. If you are not using it for too much of an investment but if you are buying one house or an extra house, I think it is quite wise to do that particularly now that interest rates have come down. However your primary focus still has to be largely equities.Q: A few times during the course of the last half an hour you have alluded to global situation with worried tone. Do you think 2016 is going to be a challenging year globally because central banks have thrown a lot of money at the problem but China is unresolved, may be interest rates start going up in the US next year. Do you think 2016 is a year where the global situation in summary is more of a headwind or a tailwind for India?A: India will stay steady. It will of course be affected in the short term but 2016, there are many pointers to 2016 being a crunch year. My one or two pointers would be, when so much liquidity has got created the stock markets have not been rising strongly in the last six months or a year, you see new peaks but then the new peaks give way or just hold where is the money going? It has come out of commodities, it has come out of oil, dollar is strengthening but it is not strengthening in one direction. So, you see a lot of confusion as to where the money has gone. Probably lot of money is sitting in the bond markets. Lot of the bond rates are not intuitive. Some of the European countries, some of the junk bonds, junk bond interest rates in the US have started to go up and I think that is the first sign that people are becoming more discerning. So, any of these things giving way can cause a big flutter.People think China is lending alright, I also believe that it will land on its feet. It will settle for a slower rate than we have got used to, maybe an average of 4-5 percent over the next 10 years. However this will not be a smooth curve. So, there could be some difficulties. US Fed you mentioned, Japan has been very bold but Japan has been a difficult country to predict. Therefore taking the whole scenario one does think that 2016 is a year to watch. However in all scenarios one finds that India should be alright, forget some short term movement one way or the other.
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