‘Ma­te­ri­als will Off­set Losses Caused by IT’

The Economic Times - - Money -

IIn a chat with ET Now, Rid­ham De­sai, Morgan Stan­ley, says do­mes­tic flows will sus­tain over the com­ing years and there­fore the rel­e­vance of FII flows will ac­tu­ally re­duce. Edited ex­cerpts: Mar­kets have di­gested the fine print of the bud­get. Is the postevent mar­ket surge a re­lief rally? Ac­tu­ally there is n ot so much fine print and not much to di­gest. Over the years we have just be­come para­noid about the fine print be­cause suc­ces­sive fi­nance min­is­ters have planted bombs in the fine print. Thank­fully, this bud­get did not have any fine print.

The wow fac­tor in this bud­get is the gov­ern­ment’s com­mit­ment to re­duce debt-to-GDP from 68% to 60%. We are not do­ing enough jus­tice to this headline com­mit­ment. It sets the stage for some sig­nif­i­cant fis­cal con­sol­i­da­tion over the next four­five years, some­thing which fu­ture gov­ern­ments will not be able to re­nege on so eas­ily be­cause the fis­cal math is some­times sub­ject to ma­nip­u­la­tion. It is very hard to ac­tu­ally fudge the debt-to-GDP num­ber.

The se­cond thing is about the SME sec­tor. Even though they do not ac­count for large amount of prof­its, they are big em­ploy­ers. For me, the tax break for the SME sec­tor com­bined with the boost for mass hous­ing will ac­cel­er­ate em­ploy­ment growth in the com­ing months. This sup­ports an econ­omy that is ac­tu­ally re­cov­er­ing quite nicely. It took a lit­tle bit of a beat­ing from the cash-ex­change pro­gramme. It is al­ready on its way to re­cov­ery from the mid­dle of last year and that re­cov­ery will prob­a­bly sus­tain with this bud­get. Our view is we are com­ing to the end of the rate cut cy­cle. So, there is prob­a­bly one more rate cut left, and maybe it is next week, maybe it is the next RBI meet­ing, but there is not much scope left for rate cuts. In­fla­tion has more or less bot­tomed, global growth is ac­cel­er­at­ing, and the Fed is likely to hike rates. In that back­drop, it is hard to be­lieve we can cut rates much more from here. It also sig­nals that In­dia’s growth is sta­bil­is­ing and im­prov­ing.

Do you sense ner­vous­ness in the mar­ket be­cause it is not sure whether the BJP will win UP? State elec­tions do not as­sume so

ON IT SEC­TOR

much im­por­tance un­less they sig­nal a big shift in trend. At best, they can cre­ate some volatil­ity, but I do not think they will dis­turb the un­der­ly­ing trend and the un­der­ly­ing trend has more to do with global fac­tors.

Peo­ple have prob­a­bly not re­alised that since Pres­i­dent Trump took of­fice, emerg­ing mar­kets (EMs) have beaten de­vel­oped mar­kets. When Pres­i­dent Trump took of­fice, every­body was of the view that the dol­lar is go­ing to rise and EMs are go­ing to be in pain. In­dia has ac­tu­ally un­der­per­formed EMs. Even in Jan­uary, we had a spec­tac­u­lar rally in In­dia, but In­dia is still un­der­per­form­ing. So, imag­ine what other EM coun­tries are do­ing right now.

ON FOR­EIGN IN­FLOWS

Do you think EM out­flows or In­dia out­flows have bot­tomed out? Cer­tainly, peo­ple are notic­ing the per­for­mance of EMs, and there­fore flows are com­ing. Flows are gen­er­ally a lag­ging in­di­ca­tor; per­for­mance comes first, and then flows fol­low. If this per­for­mance sus­tains, and it is a big if, then the flows will fol­low. For In­dia, we have less to worry be­cause eq­ui­ties are be­com­ing quite pop­u­lar as an as­set class. In the past two years, do­mes­tic flows have out­stripped FII flows and that had not hap­pened for the pre­vi­ous two decades. The do­mes­tic flows will sus­tain over the com­ing years and there­fore the rel­e­vance of FII flows will ac­tu­ally re­duce.

Will slow­dowin in IT and pharma nul­lify all the re­cov­ery seen in en­ergy and met­als?

Ma­te­ri­als will go from loss mak­ing to profit mak­ing and it will take care of all the slow­down that has hap­pened in the IT space. I think there is a struc­tural de­pres­sion in the earn­ings of IT com­pa­nies, which is go­ing to last for five-seven years. I think that the sen­ti­ment has turned far too neg­a­tive for IT, but if you are a con­trar­ian in­vestor, you may want to buy this fear.

Pharma is more idio­syn­cratic. I think some com­pa­nies will man­age to grow be­cause they will make use of the avail­able op­por­tu­ni­ties. Oth­ers may not, but over­all it is the ma­te­rial sec­tor that will drive the per­for­mance of Nifty. Even con­sumer sta­ples com­pa­nies have got a fair bit of global earn­ings sit­ting in their over­all earn­ings and those earn­ings have been neg­a­tive over the past two years. If they turn pos­i­tive, it will ac­tu­ally lift their over­all earn­ings.

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