GDP trajectory, earnings cycle revival to drive near-term sentiment

The step to infuse capital into PSU banks in a large manner over two years is certainly a big boost and is a structural positive. With the availability of adequate capital, banks will be able to shore up provisioning coverage and push for faster recognition and resolution of bad loans. Moreover, the capital provided would be adequate to meet their requirements towards fulfilling BASEL III norms, said Shibani Kurian, senior vice-president & head of equity research, Kotak Mutual Fund, in an interview with Ritwik Mukherjee. She thinks demonetisation that has started the process of forma­lis­ation of economy along with im­plementation of GST has resulted in a theme, which will likely play out over a period of time in terms of the shift from the unorganised to the organised sector. And all these are expected to bring cheer to the market. Excerpts:

It has been one year since the announcement of demonetisation. As you look back, what has been its impact on Indian equity and capital market?

Demonetisation was an unprecedented move and it brought in its wake two major structural shifts. First, it started the shift of savings from physical assets to financial assets. Cash, which was lying idle in homes of many people, moved into the formal banking system as deposits. With banks flush with liquidity, over time this would provide impetus to credit growth and maybe even provide the capit­al needed to clean up the ba­l­ance sheets of banks. A part of the money has also moved from bank deposits to other forms of savings like mutual funds and insurance that is a structural shift in the nature of retail savings.

Second, demonetisation also started the process of formalisation of the economy. This together with the implementation of GST has resulted in a theme, which will likely play out over a period of time in terms of the shift from the unorganised to the organised sector. Demonetisation has also brought to the fore the use of digital as a medium of transaction and this would help create cost-effective and seamless methods of transaction with more and more people moving away from the cash economy.

What has been its impact on the bond market?

Demonetisation resulted in a significant amount of money and liquidity move from homes to the banking system in the form of deposits. It helped shore up the low-cost savings and current account deposits of banks. With the system awash with liquidity after demonetisation, we have also seen a substantial reduction in rates of wholesale borrowing, which in turn has helped in the reduction of interest costs of the borrowers.

What has been its impact on gold and MF markets?

Mutual funds have been a great beneficiary of the shifting of savings from idle cash to financial assets. While the money initially moved to banks, from there a part of the savings have been channel­ised into MFs. Structur­ally, there is a shift in the mode of savings away from real assets to financial assets and this will continue.

What is your outlook on economy and capital market?

We continue to remain structu­rally positive on the equity market in the medium to long term even while we cannot rule out the possibility of some near-term volatility or consolidation. The pace of reform initiatives continues. Ref­orms like the insolvency and ban­kruptcy code (IBC), the Real Est­ate (Regulation and Develop­me­nt) Act and GST, while somewhat disruptive in the short-term, are transformative in the longer-te­rm. Further, most of the high frequency indicators are definitely signaling a pickup in activity. The announcement of PSU bank recapitalisation plan over the next 2 years is large and can over the time help not only resolve the balance sheet issues of banks but also spur credit growth. Along with the recapitalisation plan came the push towards infrastructure with a big focus on spend on roads. This together with the earlier announced thrust on affordable housing should lead to job creation as well. The near-term market sentiment would likely be driven by the outcome of state elections as well as the trajectory of GDP growth and the revival of the corporate earnings cycle.

What are your main concerns about the current market?

A large part of the risks pertaining to our market arises from global risks. These include the trajectory on oil prices, the pace of interest rate hikes in the US and the normalisation of global excess liquidity and any other geo political tensions. On the domestic front it is important to monitor the pace of recovery in corporate earnings and the resolution of banking system stress. Outcome of the state elections could have a near-term bearing as well.

Is there value in the private banking space now?

Private banks, especially the retail private sector lenders, are in a structurally sweet spot wherein they are gaining market share both in terms of advances and deposits. This trend will continue as they grow faster than the market. The retail private sector banks would, therefore, likely to continue to report superior growth and return ratios, which is turn would reflect in their valuations. Corp­o­rate private banks have been dealing with the issue of elevated asset quality stress and high credit costs. But their core franchise has been intact with higher gro­wth in their retail advances and strong liability franchise. While it is likely that credit costs would remain elevated for them in the near-term, they remain well capitalised. Resolution of accounts under the bankruptcy code would be a key positive for these banks.

Which sectors would you bet on at this point of time?

The key themes and sectors that we are positive on are: consumption growth being the key driver of growth, government spend foc­used on infrastructure (especially roads) and rural development, shift of savings from physical to financial assets and shift from the unorganised to the organised.

With this background, we are positive on sectors linked to consumption like automobiles, private sector retail banks as well as selective consumer names. The theme of infrastructure would likely play out through improvement in dynamics in the cement sector while the rural theme ma­nifests in sectors such as two-wh­eelers and rural finance entities. The shift towards financial assets would provide opportunities in segments such as asset management and life insurance while under-penetration and pricing rationality would help improve profitability in general insurance. Apart from this, we are positive on oil & gas and selective ban­ks on the corporate lending spa­ce.

How should the investors handle investments for near future? What would you say to retail investors at this juncture?

We advise investors to stay invested in equity and continue to invest in a disciplined and systematic manner into mutual funds. Prudent asset allocation and long-term focus are very critical for all investors. We believe that investors should seek to provide time in the market and not try to simply time the market.

Ritwik Mukherjee