While the global markets are swaying both ways, alternately on the risk-on and risk-off modes, the global environment is still not very conducive. Although global central banks — US Federal Reserve, European Central Bank (ECB) and Bank of Japan (BoJ) — are continuing monetary easing, some investors are beginning to question the effectiveness of the easy money policies.

Speaking to Bloomberg TV India, CLSA India strategist Mahesh Nandurkar said India is set to outperform other countries.

IMD’s forecast of above-normal monsoon brings in optimism, he added.

Globally, are things better off now or do you still see risks to growth and risks to fund flows from an Indian perspective?

From the market’s point of view, it all depends on the global risk-on or risk-off. In my view, the global environment is still not very conducive. Our house view is that we are at a global level where we are still stuck with a bad news or good news kind of syndrome. Over the last eight or nine years, since the global financial crisis, every time we see bad economic data globally this would typically imply that some central bank — whether it is the US Fed or ECB of BoJ — will do monetary easing or QE, and that would increase the money supply and asset prices would get a positive impact.

While the market community have being believing in the ability of the central bankers to kick-start global economic growth, my sense is that we are coming to a point where some investors are beginning to question that. We did see some negative reaction to the monetary easing measure taken by BoJ and to some extent even by the ECB. The biggest risk to the global and Indian equity market is coming from the fact that investors are losing patience and hope in the ability of the central bankers to kick-start global growth. And that still remains a clear risk in my view.

We have sovereign wealth funds around the world — like Singapore’s GIC and Temasek or the Malaysian Khazanah — sitting on idle cash. Why don’t these idle funds, or part of them, it into countries like India?

I am a firm believer that Indian markets will outperform other emerging markets and even the developed markets. But that’s a relative bet. There is enough liquidity stashed all over the world. And just to give a different view on these sovereign funds, a large part of these sovereign wealth funds is also oil money. We believe that in India, as of now, we have about $26-30 billion worth of global sovereign money invested in stock markets. At least three-fourth of that part will be oil money, which will be sitting on the sidelines. Some might question how long can it sustain. So, as far as the sovereign money go, I am not sure whether that is going to be a big source of funds for the Indian markets. But yes, there is enough liquidity available globally and certain part of it can come to India. I think the growth outlook and economic fundamentals of India is looking much better as compared to many other countries of the world. I think India has a good chance of outperformance. But let’s not forget the fact that it is a relative call.

Speaking of commodity prices, we’ve just seen an uptick in crude prices. Is that something to worry about?

Crude prices at $40-50 a barrel is actually a kind of sweet spot from India’s point of view. If crude prices are too low, we’d start worrying about sovereign money being pulled out of India. We should also remember the fact that several of our Indian labourers work in the Middle-East. Annually, we get about $35-40 billion of inflows from the Middle-East. Weighing the positives and the negatives, oil prices that are between $40-50 a barrel is actually a kind of ideal scenario from the Indian point of view. Even the Budget has factored in oil prices at $50 a barrel. If the oil prices move beyond $50, we have to start worrying about the impact on the economic fundamentals.

Is there a scenario that in next two-three years, we could be headed into double-digit economic growth?

That’s the kind of a scenario all of us will like to get into sooner than later. Given the demographic profile that we have and a million people entering the job market every year, we need double-digit growth to provide jobs for such a big part of the population coming into the job market. Whether we will see that scenario unfolding in two-three — it can happen. For that to happen, construction activity has to improve significantly from where we are. The next leg of economic activity will be driven by construction and investment and not consumption.

In the next 5-10 years, the growth improvement parameters will have to be driven by investment activities, which include investments from all segments — the government, private corporate and households. Remember, household is the biggest part of investment and property purchases is really what households invest into. For the last two-three years, we have seen a pretty downswing in property prices and volumes. We are expecting the property market to bottom up. But the recovery will be very slow. So it is unlikely that we will get into a scenario of double digit GDP growth in the next two to three years. It seems unlikely in my view because the property markets will take longer than that to get into top gear.

How do we drill down all this expenditure on infrastructure into stocks and play the Indian market story?

Broadly speaking, you can categorise Indian stocks into three categories — one is consumption-driven, second is investment-driven and third are exports-related like IT and pharma. The way to play the investment theme is to play several sectors at a time. At this point, the sector that looks most promising to me is banking, which would be the best bet in my view because it gives well-diversified exposure to all kinds of investments. The corporate-oriented banks on the private side would be the best play. There will be some sub-segments as well. So I would say in the overall infrastructural space, the road sector is doing pretty well. Going forward, power distribution and transmission segments will also do well.

What are you making of the monsoon forecasts and the kind of anticipation that we are going to start this year on the revival of the consumption front?

The IMD forecast that the monsoon this year is likely to be above normal definitely sounds like music to us because we have seen two years of severe draught with monsoon 14-16 per cent below normal. So from that point of view, this forecast brings in optimism since with this the agriculture GDP, which is 15 per cent of the total GDP in the country, can grow as much as 6-7 per cent, and contribute 50-100 bps to the total GDP growth. It will also give a breather that till the time the investment cycle picks up, we get this one year when the agriculture growth picks up and the helps the overall GDP growth to sustain. It does make us excited on the rural consumption.

If we do have a boom in construction and Indian banks are heavily skewed towards lending to capital intensive industrial kind of companies, could that mean a revival for a number of these banks?

An investment revival or a construction revival would definitely be a good outcome from the banking sector point of view. Some initiatives taken by the Government of India, especially on the steel side, have ensured that the local steel prices have increased almost 20 per cent over the last two months. Despite the December quarter, we were close to the peak and beyond FY17 the NPA ratios will come down and the banking sector will do well, especially on the corporate side.

Related Topics