Let me start off with the most difficult question: is the current inflation at home and abroad transitory?
That is a million-dollar question, is it not? And, transitory for how long? That is another million-dollar question. A lot of it should be transitory. There are a couple of reasons for that: One is the disruption of the global supply chain because of the pandemic and the second, is essentially that on top of the monetary stimulus we have had global governments introducing large fiscal stimulus. The kind of fiscal cheques in the US, Europe and a lot of other countries is leading to extra consumption which is creating demand. There is also a third factor, which is the fact that because of COVID-19 you could not spend too much on services – travel, tourism, hotels, restaurants. So, a lot of demand went into physical goods, and this is creating extra demand for commodities. Looking at these, a lot of inflation is because of the pandemic, which will not last forever. My guess is we will see a few quarters of this extraordinary situation before things start to normalise again.
How are you looking at the economic recovery in India? While there is abundant enthusiasm for a new capex cycle led by the government, the consumption economy is on its knees as reflected in recent consumer confidence surveys.
The quantum and intensity of monetary and fiscal measures have been far-far larger globally – the shape and pace of the recovery in the developed economies will continue to be a very sharp V-shaped, which we are seeing already in the US and Europe. They are coming back on track faster than India. So we have been more bullish on sectors like IT, chemicals, metals, and pharmaceuticals which are linked to global demand. The Indian recovery will be slower because of lower fiscal stimulus, lower capacity to stimulate economic activity and we are also facing the fact that inflation is rearing its head. Our call is, what you rightly mentioned, that the consumption demand in India will take longer to recover.
On the domestic side, the government’s capital expenditure, Make-in-India and the rural support that the government has continued, are the themes that we will play on. There is excitement for private sector capex as more and more sectors are included in the Make-in-India and the production-linked incentive schemes. I think activities will start soon and valuations in segments like EPC, construction, and capital goods companies are not that expensive. Demand for consumer discretionaries like automobiles and white goods is only a function of time. If not now, three or six months down the line, the demand will come back. In the discretionary segment of the market, the valuations are not that expensive.
ow do you look at the policy situation right now because if I look at the VIX in India, it is now closer to the lows we saw before the pandemic. Do you think the market is a bit too sanguine about the Fed’s tapering, inflation scenario and possibly an eventual lifting off interest rates globally?
Valuations, on the face of it, do look expensive but we have to pick the right spots. There are pockets of opportunities available. The way smallcaps and midcaps have outperformed in the last six to nine months, they have actually made up for all the underperformance of the last two years and that is being driven a lot by retail participation. Retail participation in the market is going up and it is at record highs, which leads me to believe that froth is building up. Within midcaps and smallcaps there are pockets, which are still attractive.
As CIO at a life insurance firm, you are used to looking at long-term themes that may play out over decades. In the 2000s we had infra, in the 2010s we had FMCG and private banks, what will it be in the 2020s in your opinion?
If we believe that India will come back to the 7 per cent GDP growth rate, not for one year but structurally, it cannot happen without physical asset creation. It cannot happen without manufacturing capacity; it cannot happen without infrastructure creation or real estate. Every country, whether it was Japan in the 1960s or South Korea in the 1980s and 1990s, and China post the 1990s, has grown along with a huge boom in manufacturing capacity, infrastructure, and real estate all at the same time. So, if we have to grow at 7 per cent or more for a long period of time, we have to take a bet on infrastructure, capex, and real estate.
What will be the role of green capex?
Capex can come in all sorts of things. It is all manufacturing, and you need to produce them, whether it is solar panels or batteries. And on top of it, we also have two significant developments which are: the government getting serious about ‘Make in India’ and the PLI schemes across sectors. And while interest rates may have bottomed out for the time being, they are not going to rise very sharply in India as well as globally. So lower interest rates, sanguine liquidity coupled with private sector and government capex should be the theme.
The Street seems divided on the fate of the banking space. Pandemic aside, the sector is facing threats from technological disruption, a possible new monetary order led by CBDCs, and deleveraging by both corporates and households. Is it a sector best avoided from the long-term horizon?
It is difficult for the economy to grow without financials growing and without credit growth. If you have to take a strictly market view, most of the market-cap of financials is actually now in private sector financials. Private sector banks and NBFCs are more or less in good shape, at least the large ones. So, while credit might grow at 12-15 per cent, private sector financials will actually grow at a faster pace than that because the public sector will not grow that much. So, there is easily a case to say that private sector banks and NBFCs can grow at more than 15 per cent for a long period of time.