With the Reserve Bank of India announcing another set of measures, and share markets steadily climbing up from recent lows, investors are puzzled if the Indian equity market is past the gloom, or is there more pain to come.
With the Reserve Bank of India announcing another set of measures, and share markets steadily climbing up from recent lows, investors are puzzled if the Indian equity market is past the gloom, or is there more pain to come. YES asset management company’s Senior President, Head of Sales and Marketing, Suren Kochhar, and Senior Fund Manager Kartik Soral tell Kshitij Bhargava of Financial Express Online how the stock market is shaping up. Kartik and Suren decode RBI’s second effort to inject liquidity, and identify sectors to bet on in the current market. Here are edited excerpts of the interview:
- The RBI has come up with another set of measures amidst these troubling times and has also said that this might not be the last, what do you make of it?
Kartik Soral: One aspect to the RBI Governor’s address is that by reducing the reverse repo rate the RBI is trying to push liquidity back into the system and then by targeted LRTO, it has tried to push liquidity where it is needed the most. Right now, banks don’t know what is going to happen so they are not lending but what the RBI wants the banks to do is lend forward. With the reverse repo rate cut, the spread that these people were earning is now negative. For Banks to keep funds with RBI will do any good now they will try and lend more. This address of the RBI was focused on the HFCs and the NBFCs, now coming out with TLTRO 2.0, through which Rs 50,000 crore will be channelised into NBFCs. Even the smaller and mid-size will be able to get the money that they were looking for as 50% of the funds are earmarked for them. Also, what we’ve heard in the past couple of days, on TV is that NBFCs demanded Rs 70,000-80,000 crore in the next 6-9 months. Out of this the Rs 50,000 crore has now been given so this is an aggressive move by the RBI. Saying that this is not the last of it means that RBI is still up to do whatever is needed. NBFCs are regularly into the market to get money, they were in dire need of liquidity. So, if we trace the move made by the RBI firstly it is making sure that the money is lent out in the system, secondly targeting the palace where liquidity is needed and thirdly not classifying the loans as NPAs during this time.
Suren Kochhar: These moves by the govt and RBI are swift and in direction of reviving the economy as soon as possible. We as an economy will continue to be one of the positive post this scenario. Another good move that was made today is something called LCR. Banks have to maintain LCR, now this has been trimmed to 80% so that frees up space for the banks again.
- On one side, the RBI is asking banks to lend more and they have also been asked to make higher provisions, is it a double-edged sword for them?
Kartik Soral: I won’t call it a double-edged sword, because liquidity in the banking system is not a problem. Banks are flushed with liquidity. Liquidy is a problem lower level, like NBFCs and HFCs. These people were already operating on the edge and that is their business, now people have stopped lending to these people and that is where the RBI is trying to move.
- Markets have climbed up since the last week of March, are they going to steadily keep climbing or will we see another fall here?
Kartik Soral: I don’t see a very big fall primarily because we are no longer in the escalation phase. The problem was escalating first, and it took us unaware. This is a medical problem which was not factored in by anybody. When it suddenly hit the market, the cost of capital generally increases, you know because everyone tries to incorporate that risk into the cost of capital. Now everyone has taken the precaution that things might go on for longer than expected. Secondly, the banks and governments across the globe have stepped up. So I do not see a massive fall from these levels, as long as this Covid19 is concerned, other things might come. Anyway, the recovery will be very difficult as there are no businesses left that operating swiftly. The market will remain volatile though.
Suren Kochhar: Also, to add to this point, today, everybody needs to realise the difference between a financial market and economic growth and its outlook. Equity Markets always react in a rejuvenated manner whenever there are liquidity injections being provided. Although the way the markets digest other factors, in the times markets take their own size and shape. As I always say, markets always react to information but corrects on the happening. The good news is that indian equity markets have been running very liquid, in terms of the inflows that they have been witnessing, even in SIPs even during times like these.
- What are some of the sectors that you like in this market? Also, your views on the financial sector is a complete no-no for you as well as a recent Goldman Sachs report said?
Kartik Soral: Will not completely disagree with that. In the financial sector the raw material is money, they get money and lend out money. When the cost of capital moves so rapidly it is given that the valuation of the financial sector will move as well. So it is going to be the most volatile.In the other sector we like, I see a huge demand coming back into the automobile sector primarily because there will be an increased demand for personal vehicles, so that is my opinion. Also automobiles are available at a discount from their historic valuations. There are many companies in this space that are not leveraged and are cash rich, so that is very attractive. Other growth oriented sectors, I think there’s good growth going to come for the agriculture related sector. For even the healthcare sector the time is ripe, not just pharma but even hospitals and diagnostics and well. Another sector I think where there is scope is Infa because at this time the government has no other option but to spend.
- Let’s talk about the redemption that Mutual Funds are witnessing, the RBI governor said that it has moderated now but how do you deal with this challenge?
Suren Kochhar: Talking more specifically about the industry, there are two sides to this — the corporate or institutional investors and the retail investors. Corp clients are more bent on betting in the money market. Obviously the way the markets have moved sharply, we have seen a change in thought process for the money to move from the liquid funds to overnight funds, because there were instances where negative returns were seen. But now substantial part of these have moved back to liquid funds as a category, as far as the industry is concerned which is also part of the money market. So I see that corporations are stepping into this market environment much carefully. One, because they are certainly not looking to generate negative returns on their treasury surplus, and second because of the lockdown they are running tight treasuries because of their cash-flows getting stuck . For retail investors, whether it is the fund houses, whether it is the MSDs or the investment advisors, collectively the entire industry is doing a Great job in terms of communicating to the investor on a very regular basis that look, this is the time, not to change your long-term goals, and equities you know, have always been for the long term.