As a monetary tool, the interest rate cut can be more effective after the near-term effects of cash crunch stabilise. From this perspective, I think keeping that ammunition for later months may actually be more effective to boost economic growth; by that time, more data would be available.
How much will note ban change things in the short term and how much change would be structural?
The expectation before note ban was that a good monsoon and pay commission rollout should aid economic recovery. The liquidity crunch due to note ban will push this recovery expectation to FY18. Though some measures have been taken to minimise the impact, with the large size of currency in circulation and the fact that it will be a while before the informal economy transits into the formal economy, it will definitely disrupt growth in the near term.
For sectors like consumer discretionary, the impact will be short term, more to do with postponing demand. For real estate and related sectors such as financing, the impact could be lingering and the pain more long term; the real estate market in the current form is opaque. Companies that lent against property will be affected, as the loan-to-value ratio will worsen with the likely fall in property prices and deals might not happen unless it's a distress sale. However, the likely price correction and fall in interest rates could bring back demand over the medium to long term.
What recovery is expected for discretionary spending?
Don't judge the pain here based on November numbers. For automobile companies, bookings on the wait list would have helped November sales. December could be tough, though things would start to improve by January.
However, FY17 net profit recovery expected in the second half of the financial year now appears to have got pushed ahead, though it provides a favourable base for FY18 growth. Downward revision to net profit estimates had reduced to 1-1.5 per cent in the past two quarters. Now, we will get into a scenario where predicting numbers would be an issue in the near term. So, I expect net profit downgrades to increase for FY17.
How are you rebalancing your portfolio after note ban?
My portfolios were directed towards cyclical recovery. I was overweight on automobiles, cement, banks - particularly private sector banks and non-banking financial companies, and some construction stocks. I was neutral on information technology (IT) but that's changing. Large IT companies are available at less than 15 times their PE (price to earnings or net profit ratio) and that is comforting. The domestic cyclical orientation is getting moderated by an increase in allocation to IT for my portfolios as domestic recovery is slightly pushed. In a scenario where certain segments like consumer durables are quoted at a far higher valuation and growth is moderated, IT looks attractive. In certain pockets, not necessarily due to note ban, where valuations weren't justifying growth expectations like a few corporate private banks and cement stocks, there has been a reduction in exposure. I am still not sure about the metals sector -— how much it would benefit from the likely infrastructure thrust of the US. We are positive on the gas side of the energy segment.
There are a lot of global uncertainties.
Yes. After the US election outcome, the uncertainties around trade with the US and around the pace of the US Federal Reserve rate increase have led to a selloff across emerging markets
(EMs). Polices in China are also unclear. EMs, including India, have seen significant outflow in the past one month as investors shift to developed markets to avoid risk. So, the market correction is not only due to note ban.
India has some advantages in these uncertainties, such as long-term domestic demand potential, skilled labour, engineering skills, and lower dependence on exports. So, as risk-taking sets in, India will surely attract flows. Despite that, volatility is expected to remain high in the coming months. Normalcy returning in six months doesn't wash away volatility from the markets, as their correlation to global stocks has gone up quite a lot.