Recently we saw banks
cutting their interest rates
sharply, which have helped in
the transmission of the policy
rate cuts by the RBI into the
economy. The cuts in the
interest rates were aided by
very strong inflow of liquidity
into the banking system due to
the demonetization exercise.
The strong liquidity has
boosted the CASA (Current
Account & Savings Account) growth of the banks and has
reduced their cost of funds. On the other hand the growth
in credit flow (non-food credit) into the economy has been
quite anemic as capex from private sector has been muted
and many companies are into the deleveraging cycle.
The decline in the interest rates would therefore act as a
booster for the corporates on atleast two counts. Firstly it
would reduce the interest burden on many companies and
thus boost their bottomlines; secondly it would induce and
act as a catalyst for both consumption demand and capex
by Private sector. Early signs of Private capex revival has
already started to be seen with one of the largest steel
makers in the country recently taking about a large capex
plan.
One of the key drivers of the capex activity in the economy
has been the commodity producing companies. These
companies were impacted quite negatively in the previous
few years due to the sharp decline in the commodity prices
globally which impacted their profitability. However, with
most of the commodity prices having seen a strong rebound
and the measures taken by the government on reigning in
the dumping of metals in the country (primarily steel) with
high import duties, the metal sector and especially steel
sector has been seeing signs of improvement. The metal
prices also seem to be sustaining after a sharp bounce
from the lows which can be good news for the sector.
The focus of the government into improving the dynamics
of the core infrastructure sectors like Roads, Power,
Railways and Ports suggests that the troubles that these
sectors saw in the past in terms of policy roadblocks,
clearances and transparency issues, seem to be behind us.
Higher allocation on infrastructure spending in the budget
also reflects the government’s commitment to the sector.
The Banking Sector in the country has been impacted
negatively due to high NPAs mostly from the above
mentioned sectors. Total NPAs of the Banking sector
is more than
R
6 trillion and a large part of the NPAs are
accruing from Metal and Infrastructure sector. High NPA
and lower profitability has impacted the Banking sector
and largely the Public sector banks, with their valuations
dipping sharply. However, with the expected improvement
in both the Metal and Infrastructure sectors, there is a case
for improved performance of the banks with large exposure
to these sectors. Moreover, effective implementation of the
Insolvency and Bankruptcy Code can potentially improve
the Banking sector performance. This can lead to rerating of
the banks along with rerating of sectors like Infrastructure
and Metal.
With most of the cyclical sectors showing signs of
improvement, there is likelihood of an incremental shift in
the portfolios of investors from defensives (IT, Pharma and
FMCG) to cyclicals and consumer discretionary. This can
be a strong theme for the next few years as the improved
economic growth boosts corporate earnings of cyclical
sectors.
Recently, the equity markets saw sharp corrections during
the demonetization period and post the election of the new
US president. The markets have seen strong bounce back
from its recent lows led primarily by the strong inflows
from the Domestic Institutional Investors (DIIs). Since
November, while the FPI’s (Foreign Portfolio Investors)
have been strong sellers, the market was stabilized by
robust DII inflows (which have been strong for the whole
FY17), which not only absorbed the FPI flows but also
helped the equity markets reverse most of the correction.
We think that lack of higher returns in other asset classes
like Gold, Real Estate and Fixed income could be a reason
of increased investor participation in equities. Thus the
importance of DII and consequently the domestic retail
investor has only risen in the recent times. We do expect
the FPI investments to revive again in the current year
given the robust macroeconomic indicators of India which
then have the potential to take the markets to a higher
trajectory. The Indian equity market therefore still provides
good opportunity for investors to invest from a 2-3 year
perspective, in line with their risk profile.
Abhay Aima
Country Head - Global Consumer Business, Private
Banking & Distribution, Direct & Digital Banking and
Retail Liabilities.
I
ndia
market
outlook
