Markets waiting for revival; NBFC row can be resolved: UTI AMC's Ajay Tyagi

Ajay Tyagi, UTI AMC
As expectations build around the upcoming Budget for the markets to take cues from the policies announced and decide their trajectory, AJAY TYAGI, executive vice-president and fund manager, equity, UTI AMC, tells Swati Verma that letting go of 3.4 per cent of the fiscal deficit target for this year won’t be a bad option. The priority, he says, is to arrest the declining growth momentum. Edited excerpts:

How will the second half of the calendar year 2019 (CY19) play out for the markets?

It's difficult to predict the course with any degree of certainty. We have got ‘Modi premium’ again. Had there been a change in power or a coalition government, there could have been a reversal of a number of existing policies, thus disturbing the stability.

The tough battle, though, starts from here. GDP (gross domestic product) has slipped below 6 per cent and the unemployment rate is at a multi-decade high. For the economy to move back again into 7 per cent growth trajectory, the government needs to do a lot, which includes fiscal measures. Letting go of 3.4 per cent of fiscal deficit target for this year won't be a bad option, as the first thing that we need to arrest is the declining growth momentum. From that perspective, markets may witness some bit of consolidation, waiting for most of the macro-economic vectors to get back in shape and revival of corporate earnings growth.

It must be noted that GDP growth has suddenly turned very weak but corporate earnings have always been weak in the last five years. Both these variables have to turn around for the markets to move higher.

Do you see flows from the mutual funds, domestic institutions and retail investors now pick up pace?

Most retail investors, unfortunately, look at the rear-view mirror in terms of returns from different asset classes to decide on their future allocation. In case of mutual funds, the flow of money predominantly comes from retail investors, and as I look at things, investors haven’t made money in the last one year or so. They might take more time to regain their conviction on the ‘India growth story’ and concomitant wealth creation. However, from a structural perspective, I see more and more retail investors channelising their savings into equity markets through mutual funds.

Do you see the situation getting worse for non-bank finance companies (NBFCs) in terms of liquidity?

It's a wake-up call for NBFCs that have not carried their business with prudence. For any financial institution, one of the most important principles is asset-liability management (ALM), which includes keeping some portion of the balance sheet fairly liquid for an unforeseen event. The stress that has happened in the last six-seven months is more of an ALM crisis rather than a crisis on account of toxic assets and bad loans. So, to my mind, the issue is resolvable, provided liquidity support in some shape and form is provided to these stressed NBFCs to restore overall confidence in the system.

Your Budget wish-list?

I want the government to be slightly expansionary in this Budget. They should take their eyes off the fiscal deficit target. It won't be a bad thing to allow the fiscal deficit to slip to 3.5 per cent or even 3.6 per cent this year to pump-prime and kick-start economic growth. And the time is ripe to do so as currently the cost of capital, as well as inflation, are extremely favourable.

What has been your investment strategy amid all this?

We have been following a fairly stable strategy in terms of sectoral outlook. We continue to remain bearish on global cyclicals like energy, including oil and gas, metals. The negative stance on them has only strengthened because if the trade war continues, we will see a further negative impact on them. On the other hand, I am positive on the consumption sector. Although it has been witnessing slowdown since the last two quarters, if India is to do well and economic growth is to happen the way we are forecasting, the one sector that will certainly do well is consumption. This could include consumer discretionary and consumer staples.

I am also positive on the banking sector. As the growth comes back, we will need credit to support the overall GDP growth. But here, I am being selective and investing only in private sector banks. That apart, I also like the IT services. There are good quality companies with a strong balance-sheet and cash flow generation. IT spends have become more integral to corporate strategies now.

Do you expect the Reserve Bank of India (RBI) to alter its monetary policy stance over the next few months as monsoon, inflation and trade war fears play out further?

Not so soon. I say this not only because inflation is favourable right now, but is also expected to be benign throughout 2019. Secondly, the RBI would also want to provide ample liquidity into the system to avert any crisis as regards NBFCs. Finally, to restart growth, it is only logical to not only provide ample credit in the system but also provide it at a fairly cheap cost.

What is your view on corporate earnings?

Every quarter, there is some issue or the other impacting India Inc’s growth. Last quarter, it was liquidity squeeze in the overall functioning of the economy that led to a slackening of sales in several pockets. This, in turn, impacted corporate earnings growth. Regarding revival, all the factors that we discussed above on economic growth have to play out for corporate earnings to go back into mid-teens.

We expect a low-teens earnings growth for FY20. Notwithstanding the current slowdown, there is a favourable base effect that will help clock a double-digit earnings growth for FY20. But, we do really hope that the economy turns around quickly in order to enable this earnings growth to sustain a double-digit momentum going forward.

Which sectors can surprise us positively/negatively going ahead?

The auto sector can surprise really quickly and fairly positively. There has been a huge amount of demand destruction in the last few quarters. As financing comes back, the auto sector will surprise us positively. We can also see some positive surprises from consumer durables and consumer discretionary sector in the middle of FY20. Global commodities or global cyclicals can surprise us negatively if the trade wars aggravate.

Your view on crude oil and rupee?

Crude oil is the big joker in the pack, but should remain range-bound. This is good news for India, which is a major importer of crude. Rupee’s fair value is 70/dollar. Anything significantly below or higher than this level will be undervaluation or overvaluation.