‘Materials will Offset Losses Caused by IT’
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.