We are getting into structural bullish phase for 4-5 years: Vikas Khemani

In an interview with Business Standard, VIKAS KHEMANI, founder, Carnelian Capital Advisors says earnings should grow by 13-15 per cent in FY21 and the broader markets should deliver 18-20% in 2020

The US-Iran standoff saw the markets correct, but any correction is an opportunity and not a threat, says VIKAS KHEMANI, founder, Carnelian Capital Advisors. In an interview with Vishal Chhabria, he says that earnings should grow by 13-15 per cent in FY21 and the broader markets should deliver 18-20 per cent in 2020. Edited excerpts:

How do you see the US-Iran standoff play out? And, its implications for the Indian markets and earnings?

The immediate impact is a hike in oil prices, which is why the market corrected a bit. For now, it looks temporary and has more to do with the forthcoming US elections, with an aim to deflect attention from the impeachment (of US President Donald Trump). While it seems unlikely that it will turn into a major conflict, it is difficult to predict how it will pan out. For some reason, if it prolongs, it will have an impact on the markets. However, any correction should be seen as an opportunity to buy stocks, because a lot of things are fundamentally well-placed and moving in the right direction, rather than a threat.

What is the possibility of a risk-off trade across global markets?

Again, it depends on how big the conflict turns into. It is unlikely to run into months because, in my opinion, I don’t think Iran can retaliate against the US in a big way. So, I don't see a high probability of a risk-off trade across global markets.

Government has taken various steps, but earnings and economic indicators remain weak. When do you see these measures translating into growth?

The biggest reason for the slowdown in economic growth is a lack of capital or credit after the IL&FS crisis. NBFCs (non-banking financial companies), which were growing rapidly between 20 per cent and 25 per cent, started de-growing. About ~6-8 trillion worth of incremental money, which was going into the system every year, stopped. This had a cascading impact on everything — the sale of homes and automobiles, which are mainly bought using credit, as well as smaller businesses (SMEs). The GDP number that we saw was a result of this. While we are still nowhere close to the normalcy of credit, it is getting better. So, while all the measures taken are welcome and will help growth, the larger impact will be seen with a pickup in credit growth.

When do you expect liquidity and cost of funds normalising for companies?

This has started to change, a little bit, with measures like the government’s last-mile real estate funding scheme, the Reserve Bank of India (RBI) allowing delay of recognition of SMEs bad-loans until March 2020, and bank recapitalisation which allows to gradually open up risk appetite. Over next six to 12 months, this will get better but for credit growth to reach 20 per cent, it may take one or two more years.

The government’s fiscal situation has worsened and now there is pressure due to a likely surge in oil prices. How bad could it get?

The immediate impact of the tight fiscal situation is that the government, which has been spending in the last couple of years, is now spending less, which is worrisome as private sector is also not spending as much, and that has impacted growth. The only answer is that government has to relax its fiscal deficit target temporarily for one or two years. Once growth comes back, tax collections will pick up. If the government takes a little leeway on fiscal deficit, markets would welcome it.

High crude oil prices don’t make a difference to fiscal deficit because now there is complete pass-through mechanism for oil companies to pass on the increase in costs. However, oil prices will have some impact on inflation. With inflation under control, that is also not as worrisome. Currently, I'm not worried about fiscal deficit and inflation as much as I'm worried about growth. And we need growth boosting measures, and credit supply is the most urgent push required.

What are your expectations from the budget?

The government has not waited for the budget to make announcements, they've been making it regularly to kick-start the economy. In that sense, we will look for only three things—government's view on the fiscal deficit, divestment and what it does to cut individual income tax rates. Some relief on individual tax rates is expected, divestment targets are likely to be big, which will give an indication that government is willing to do strategic sales. Market also expects government to loosen fiscal deficit targets so that spending is not cut.

There have been protests relating to CAA and now growth has also slowed down. Could these change India’s image with foreign investors?

I don't think these as big issues. We have seen such things in the past like intolerance debate, removal of article 370 with respect to Kashmir, etc. Right now, these don’t appear to be big issues and in my opinion, they will be short lived. India is far bigger opportunity to have impact on such issues.

Your earnings estimates for FY21?

Due to the credit growth issue, FY21 will not see very robust earnings growth. It should be 13-15 per cent. But, we need a higher number and would like to see structural growth coming back.

Do you expect polarisation in markets to continue? And, for how long?

Polarisation, in fact, will reduce now, because of a few things happening now. Our bigger hypothesis is that the risk averseness will subside and risk-premium will reduce in this year. Why?

Two big factors: Global and local liquidity. From 2013, the US Fed started tightening liquidity by unwinding its balance sheet and increasing interest rates. So, liquidity was becoming tight and the dollar was strengthening, and so, emerging markets hardly got any money from developed markets, including the US. Now, the Fed has started decreasing interest rates and is expanding the balance sheet again.

Second, the RBI is sitting on huge liquidity, and risk-appetite is slowly opening up. So, we see liquidity environment remaining very positive, both globally and locally for the markets.

The reasons why polarisation happened was that risk-appetite was going away with liquidity, and investors moving to safer and quality stocks. I’m not saying that these stocks will not do well, but the polarisation gap will narrow and mid-caps as a basket will do well. 

For 2020, what is your outlook for the markets?

We are very positive. We are getting into a structural bullish phase for next four-five years with easy global and local liquidity and a lot of structural drivers to growth. 2020 will be much better than 2019. I'll be surprised if the broader markets don’t give 18-20 per cent returns, even as leading indices may lag.

Given the government’s divestment plans are PSUs worth considering?

The government has stated intent to divest a lot of PSUs, which is why we are seeing gains in these stocks. But, before market re-rates the PSU basket, the real test would be to divest one or two companies like of BPCL or Concor smoothly, which will give credibility to the government. Because, so far, they've not been able to do a single strategic divestment including Air India, IDBI Bank, etc.

Which sectors will do well?

Banking and financial services, both credit and non-credit segments, will do well. Discretionary consumption will do very well as per capita and disposable incomes rise. Interestingly, manufacturing is picking up. There are a lot of contract manufacturing plays; they are small now but can do well over a period of time. Telecom is benefiting from consolidation. Even IT should do well with developed markets growing and a soft currency. So, even as India will have a broad-based rally, some segments will do better.