Reserve Bank of India
Milind Muchhala, Executive Director, Julius Baer India, says the RBI seems to be behind the curve, especially in the current environment of rising inflationary pressures and various global central banks adopting a tightening stance.
Julius Baer expects the RBI’s stance to turn hawkish in the upcoming policy meet (February 8-10).
On investments, he said: “We think it is a good time to focus on the infrastructure, construction, capital goods, banks and realty sectors. We have been positive on domestic cyclicals and the plays on revival of the domestic investment cycle for some time now.” Muchhala has over 20 years of experience in the industry, including in equity research, advisory and wealth management.
We are nearing the end of December quarter earnings season. How do you read quarterly earnings announced so far?
The Q3FY22 earnings season, at least until now, has been quite in line with expectations. While the season began on a decent note with healthy numbers from the IT sector and a couple of large banks, it was followed by some soft numbers from sectors such as consumption, cement, auto, etc., as expected, due to weakness in rural demand and persistent input cost pressures.
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The post-result management commentaries have remained constructive with expectations of an improvement in the demand environment. Once the raw material pressures start waning, it could result in better earnings momentum for the companies. The key monitorable will be whether there are any cuts to the earnings estimates for the next couple of years, as the past few quarters have seen an upward revision of the estimates, which has been liked by the markets. The healthy expected earnings momentum remains one of the key supports/drivers for the market.
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What are your broad expectations from the RBI policy meeting scheduled next week? This is the first meeting after the Union Budget…
The RBI seems to be behind the curve, especially in the current environment of rising inflationary pressures and various global central banks adopting a tightening stance. The recent Budget announcements of an increase in Government borrowings and a higher-than-expected fiscal deficit number have clearly weighed on the bond markets and will push the RBI to re-think its course of policy action.
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We expect the RBI’s stance to turn hawkish in the upcoming policy meeting, and there is also the likelihood that it may reduce the repo-reverse repo corridor by hiking the reverse repo rate.
Do you think the budget will help in consumption revival given the high unemployment and rural distress in the country?
There have been no direct measures announced in the Budget to provide a boost to consumption, which was a small disappointment. However, the Government has probably preferred the capex route by focusing on ‘quality’ expenditure to revive investments, create employment and have a trickle-down effect on consumption. Also, as the economy gradually comes out of the grip of the pandemic and opens up, it will lead to better consumer demand.
Rural demand has been under pressure in the past few months due to the wider impact of the recent waves of the pandemic (resulting in savings for medical emergencies), delayed harvesting and inflationary trends (hurting volumes due to limited budgets). However, it is expected to see an improvement in the coming period with improvement in cash flows, as crop productivity (both kharif and rabi) has been decent. Lower medical spends and the continuing focus of the Government to improve farm income should also support rural demand.
Is this the right time to invest in infrastructure, construction, capital goods, banks and realty stocks, especially after the Union Budget , where capex has been increased by 35 percent to Rs 7.5 lakh crore for FY23?
Yes, we think it is a good time to focus on these sectors and re-visit allocations, if required. We have been positive on domestic cyclicals and the plays on revival of the domestic investment cycle for some time now; the Budget, with higher allocations and a clear-cut focus on Infra spends, has cemented that view further. Our positive view on the space has been premised on expectations of a revival of the capex cycle in the country, especially from the private sector, aided by benign interest rates, deleveraging of corporate balance sheets over the past few years, improving utilisation levels, increasing export opportunities and government measures such as PLI (production linked incentive).
With the government doing the initial heavy lifting for investment and creating a virtuous environment for growth, the private sector is eventually expected to join the growth capex. The pick-up in order flows will lead to increased investor interest in the space.
FIIs have already sold more than Rs 1.4 lakh crore worth of Indian equities since October 2021. What are the decisions by the Fed that could hamper FII flow in emerging markets, including India?
FIIs have been aggressive sellers in Indian equity markets since the past four months, driven by a combination of factors, including: (i) Strengthening of the dollar index (ii) Some money moving out of secondary markets to primary markets (iii) Profit booking, with India being a large outperformer versus other emerging markets till end-Q3CY21 (iv) A risk-off environment due to the new variant of the pandemic, and on concerns of elevated inflation levels and their implications on tapering/interest rates.
While the global markets have already started pricing in the already announced measures by the Fed, including their tapering plans and three-four rate hikes in CY22, any rhetoric/action divergent from the already announced measures is what can further weigh on the markets. This includes the quantum and pace of rate hikes during the year, which in turn can be dependent on the incremental incoming data related to inflation and unemployment.
In the event of an intermittent risk-off environment or a sharp rise in the dollar Index, it will have a bearing on FII flows across emerging markets, including India. However, we believe that markets like India, with relatively higher economic growth and healthy earnings momentum, should attract relatively better FII flows.
What are the themes that one should consider for the portfolio with a 1-2 year perspective?
We continue to believe that earnings momentum will remain a key support for the market. After a period of almost seven years, wherein Nifty earnings grew in low single digits, we have entered a phase of strong earnings momentum since FY21, led by a robust economic recovery, low interest rates, massive pandemic-induced cost restructuring by corporate India, and a high degree of operating leverage.
In the short term, while one will need to be tactically positioned to take advantage of sharp market movements, the market corrections can also provide a good opportunity to build up on equity exposure for medium-long term investors, as we remain constructive on Indian equity markets with a 2-3 year time horizon.
The four themes that we are currently focusing on are: (i) Continuation of Earnings Momentum (ii) Pick up in the Investment Cycle (iii) Future-ready corporates/Digitally transformed companies (iv) Sustainable Investing/Decarbonisation. Our preferred sectors include domestic cyclicals such as Financials, Industrials & Infrastructure, Real Estate, Building Material and Auto. We will also be positively biased on consumption (especially discretionary), Healthcare, IT (on corrections) and select names on a bottom-up basis.
What are the three things you liked as well as disliked the most from Union Budget 2022?
While the relative importance of the Union Budget from a financial market standpoint has been reducing over the past few years as various important decisions and initiatives are being taken outside the Budget, the criticality was more from the stance of the Government and its balancing act between providing a growth stimulus and fiscal prudence. Three key positives in the Budget, we believe, are the capex focus, no populist measures despite getting into several State Elections, and realistic numbers.
This year’s Budget continued the growth impetus laid in last year’s budget by focusing on ‘quality’ expenditure, growth and all-inclusive welfare. Rather than taking a populist bend (as also reflected in the lower allocation to MGNREGS), the government rightly preferred to provide a growth stimulus by focusing on capex and increasing the outlay by a healthy 35 percent. The underlying focus on promoting domestic manufacturing has also continued with several measures to support ease of doing business and focusing on improvement of infrastructure in the country (including through PPP route). The overall numbers presented in the Budget also seem realistic and achievable.
Among the three key areas where the Budget fell short of expectations, firstly there were no direct measures to support consumption, especially considering that the demand environment has been weak for some time and some measures could have provided good sentimental support. Secondly, the targets on Divestments/Asset Monetisation seem muted, as this has been a sore point for the Government and they could have been more aggressive on this front (with some committed timelines) to meet the increased spends expected. Lastly, there were some negatives that cropped up for the bond markets in the form of higher-than-expected Government borrowings and the fiscal deficit number, and no measures for FIIs to encourage India’s inclusion in global bond indices.
Oil prices are back above $ 90 a barrel, and if they hit $ 100 a barrel in the near term, will this dampen market sentiment? Should one be worried about such a correction?
The recent surge in oil prices is definitely a concern and a sentiment dampener, especially in the current environment of inflationary pressures. While a short-term spike could be potentially absorbed, if prices start to sustain at elevated levels, it will definitely lead to some jitteriness because of the implications for deficits, currency and inflation. As of now, our global research desk view is not that positive and they expect prices to trend lower during the course of the year as supply-shocks reduce; however, it will remain a key monitorable and a source of risk for the market.
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