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India's consumption story is not nearing an end, says Vikas Khemani

Business Standard:  May 13, 2019

New Delhi: US-China trade war fears and election-related uncertainty have made the markets nervous over the past few sessions. VIKAS KHEMANI, founder, Carnelian Capital Advisors, tells Puneet Wadhwa that when these issues start to settle, the markets, which are currently in a risk-averse phase, too, will stabilise. Edited excerpts:

How will US-China trade impact the world economy and markets?

De-globalisation and protectionism have been on the rise for three-four years and the ongoing trade-related issues are not

new. These kinds of adjustments take time and are settled over a long period. The negotiation process will always see many tantrums with push and pull from all sides. The markets tend to respond to the situation depending on the signals they pick. I feel the US-China trade dispute will get settled over the next 6–12 months. The good part is that India has not been adversely impact from a trade perspective, though it can’t remain fully isolated as the Indian currency will have to adjust to other emerging market (EM) currencies.

How does India look as an investment destination within emerging markets (EMs)?

India is one of the best EMs in the world. It is a high-growth potential market with a fairly good mix of domestic consumption and investment. That’s also one of the reasons why India trades at a premium and outperformed EM basket almost by 70 per cent over the last 15 years. Due to trade-related issues, one might see some EMs getting adversely impacted; but India is placed much better. That’s the reason you are seeing a lot of foreign direct investment (FDI) flows into the country.

Do you expect flows into equities to pick up pace after the general election?

The markets are dealing with several big uncertainties right now like the election outcome, earnings momentum, tight local liquidity, global trade issues, and global growth moderation. All these issues will keep the markets volatile and uncertain over the next three-six months. As some of these issues start to settle, the markets should also start stabilising and create a base for growth. Given the overall uncertainty, even flows will remain volatile.

How comfortable are you with the valuations at this stage?

Valuations do look stretched if one looks at the overall index since broad-based earnings growth has been missing for quite some time. I do believe after significant reforms over the last few years, earnings should look up in the second half of the current financial year.

How will corporate earnings grow in FY20?

Earnings growth may not be 20 per cent and is more likely to be around 15–16 per cent with a lot more back-endedness. The IL&FS and credit market crisis took a toll on the economy. We had a significant drop in lending, including consumer lending. Liquidity remains tight. As it eases slowly, one should start witnessing a recovery.

How are you reading the macro numbers? Is the ‘consumption story’ nearing an end?

India’s consumption story is not nearing an end. It is just a small bump due to the credit crisis. As this settles down, consumption will pick up. Most macro numbers – be it inflation, fiscal deficit and GDP (gross domestic product) seem to be in decent shape. This has given the Reserve Bank of India (RBI) confidence to embark on rate cuts. Given that global growth is slowing, it is unlikely that crude oil prices will rise significantly.

What is your advice to investors who want to enter markets now?

One should look to systemically deploy over the next three-six months, as it is a fairly volatile period right now. Once the election outcome is known, one can take a fresh call.

How should investors position themselves as regards the interest rate sensitives?

­­­India has a very high real interest rate, which is not justifiable. We have to cut rates and infuse enough liquidity into the system to create demand. As global growth slows, rates will come down. I see a sharp drop in rates over the next one year. We are positive on interest rate sensitive sectors.


Can the mid- and the small-cap segments outperform their large-cap peers in CY19?

Mid-caps always do well when there is risk appetite. Currently, the markets are in a risk-averse phase. Most investors are preferring to invest in large and liquid names even if they are expensive. Sizeable returns are always made on a wall of worry. There are many good mid-caps, which are available at a reasonable value. We think they will be multi-baggers over the next few years.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.