Stage set for gradual recovery in broader markets over next year: Sunil Subramaniam, Sundaram MF
Things are not going to recover right from tomorrow but over the next three to six months, one can definitely see the underpins of an economic recovery, says Sunil Subramaniam, MD & CEO, Sundaram Mutual Fund.
by ET Now
The market has been very polarised with action continuing to be concentrated in some of the core Nifty names. But we have also seen a pretty good series when it comes to the broader markets and some of the midcap names. What are you deriving from the data?
The impact of all the actions are beginning to be seen. The manufacturing PMI, the services PMI, IIP, business confidence index in manufacturing and in services, all are showing a positive uptick. I am leaving aside the coronovirus related recent events. There is a sense that the worst is behind us and that recovery is not too far. That does not mean that things are going to recover right from tomorrow but over the next three to six months, one can definitely see the underpins of an economic recovery.
From the economy perspective, for you all you have to do is look at food inflation data. While everybody is saying high food inflation means RBI would not cut rates, I look at it slightly differently. For me it was the hyper low and in fact sometimes negative food inflation which has hurt rural consumer confidence and that is why you saw rural people not purchasing things that they would normally do. Now with the rains, which came at the wrong time for the kharif crop and destroyed the crop but in doing so, onion and potato prices went up. With the rabi sowing being so strong across Gujarat, Punjab and Maharashtra, we are hoping that with a good harvest and rising food inflation, consumer confidence in the rural sector is coming back and that will reflect on consumer discretionaries. There are underlying footprints in the economic data which are showing that the worst is behind us; plus business confidence is returning and that is why from a flows perspective, FIIs have put in about Rs 65,000 crore. You were talking about polarised largecaps, ETFs have put in about Rs 27,000 crore from April to now. So, that is Rs 90,000 crore, But you will be surprised to know that pure largecap funds have got Rs 11,000 crore but mid and smallcap funds have got Rs 16,000 crore net flows into the industry.
Clearly there is a lot of smart hot HNI money which is moving into the smallcaps. One of the reasons for the rally is the underlying business confidence but the fact is that there are people who are looking at the 20% discount of the small cap index to the large cap index and saying hey, things cannot get worse, so why do not I get in? That is why you have six months returns of 14.5% on the midcap index and about 17% on the small cap index.
The situation is right for a gradual recovery in the broader market over the next year and that is what we have always been positioning our portfolio for.
One simple answer could pour cold water on the bullish case you have made -- the coronavirus scare.
Yes.
Finally we agree.
No, definitely the virus was unexpected. It was like a meteorite that hit us from Venus or Mars or wherever! Nobody expected it to happen and clearly it is a worry for the global markets. The Chinese though have been far more open and proactive about it. There is worldwide impact over the short term. That uncertainty factor will be baked into the market but I would still maintain that if there is a stock or a sector that you like from a three-year perspective, and this coronavirus factor is going to lead to an artificial correction, isn’t that an excellent time to buy?
What is that one thing you would look out for in the Budget to understand the attitude and the message of the government?
I would look for two things; the first thing I would look for is respect for the capital markets. Given the fact that on the fiscal side, the government is hugely dependent on the divestment programme, I think they have to look at the capital markets as the ultimate panacea for their problems. They have to treat the capital markets with kindness and make the statement that wealth creators are people we like and will promote. Messaging wise, that signal will come through a LTCG waiver or a delay in whatever form. The key driver is that the capital markets are the ultimate solution to the fiscal deficit of the country and have to finance the growth of the country. The due respect must come through in the messaging.
The second thing I would like to see is everybody knows that the news on the fisc is bad. They went and cut the corporate taxes, they have cut down their infra spending, the report card is not going to look good and so that is discounted. But what the market would like to see is that the government has not lost confidence in going and telling the world that we are going to live with a slightly larger fiscal deficit the coming year but we are going to spend that money on things which creates jobs, infrastructure and have a long term multiplier effect.
The government shying away from that and getting worried about the fisc and actually starting to crunch its balance sheet next year would be a very bad sign. I think the world is willing to cut us some slack and from that perspective, the market would like to see a confident government saying okay 3.5-3.6% for next year is what we are going to do. The money we are going to have will be spent to boost long-term growth. I would like to see those two clear signals from the Budget.
Consumption companies are not reporting a large drop in their volume growth. What are some of these companies indicating to you? We may talk about the GDP growth plunging to a decade low, but if consumer companies are growing, then this slowdown is not across the board and it is not widespread. Pidilite is selling more Fevicol; McDonalds is selling more burgers and Jubilant is selling more pizzas.
This is all part of a malaise where since we have got used to 7% GDP growth. We are actually thinking India would go to 8% and maybe double digit and suddenly we have had to course correct and look downward. That sense of pessimism has overtaken everybody. If you look at bank lending, there is 5% to 6% growth all the way up to 25% in various sectors of banks. Only metals & mining and quarrying are the two sectors with negative loan growth rate
. So 5% to 6% growth rate in bank financing whether it is retail, consumer cars, consumer loans, credit cards indicates that people are taking money. Yes, it could be that there is a problem with 20%. The problem arises between what we perceive to be the real India growth engine versus what is the ground reality, but the ground reality is not that it is a downward trend or a recession. It is just the slowing down of the growth rates.
Consumer companies are very good bets because ultimately at the ground level, India is not in a recession. Even IMF is projecting that next year, we will be back to 6.5% GDP growth and when overall world GDP growth is going to be 3.3%, India is going to grow double the global rate. We Indians tend to get this pessimistic attitude because we do a lot of our actions based on a huge promise and when that promise does not get fulfilled, we get disappointed and have extreme reactions. The right way to say it is India is a growing economy, yes it is growing slower than it should have, but it is still a growing economy and that is where the consumer story is also playing out.