Need to have a focused, time-bound resolution plan for realty, NBFC sectors: Vinay Khattar, Edelweiss Broking

Published: January 7, 2020 3:15:02 AM

Our hypothesis is that, with the expansion of balance sheets and pickup in demand, and with commodity cycles bottoming out, commodities may begin to pick up, and you get automatic inflation which acts as a trigger because then, prices begin to go up. Inflation sets in, which causes the economic activity to pick up as commodity producers will now have more money.

realty sector, NBFC sector, Vinay Khattar, Edelweiss Broking, GDP, india GDP, market in 2020, 2020 market newsVinay Khattar, head of research at Edelweiss Broking

The year 2020 could be good for investors as central banks across developed countries are expanding balance sheets and the commodity cycle has bottomed out. In a free-wheeling chat with Yashasvini Razdan and Vivek Kumar Jain, Vinay Khattar, head of research at Edelweiss Broking, says that, for any meaningful recovery in India, builders need to be put back on their feet. Excerpts:

What can investors expect from the market in 2020?
Our broad thinking is that 2020 is going to be a good year for investors, a predominant reason for this being the change in the global macro economy. We have seen significant expansions in the balance sheets of most developed countries. The second big factor, if you look at the entire commodity space, as per Bloomberg’s commodity indices for the past 20 years, we are at a level of commodity prices which existed close to what it did in 2001-02. Almost 18-20 years have passed, and commodity prices are still at a level that indicates contraction in pricing that has happened in past few years.

Our hypothesis is that, with the expansion of balance sheets and pickup in demand, and with commodity cycles bottoming out, commodities may begin to pick up, and you get automatic inflation which acts as a trigger because then, prices begin to go up. Inflation sets in, which causes the economic activity to pick up as commodity producers will now have more money.

The third big factor, which is playing out, according to us, is that the Feds have realised that the dollar needs to go down. More the dollar depreciates, more the commodities begin to go up, in absolute terms. Thus, a pickup in the commodity cycle, leads to a pickup in economic activity across the world and is also beneficial for India. So, our sense is that this is one of the core things that will play out and will be positive, not only for the economy but also for the markets.

What about growth? Do you expect the growth to revive in the next fiscal year?
Our sense is that some of the earlier tell-tale signs are beginning to play out. These are very short-term so we would want these trends to mature to a certain extent before we can comment that these green shoots are genuine. Recently, considering data from November, the services PMI has shown a clear uptake. Services constitute almost 60% of India’s GDP. That is going to be the first tell-tale sign whether economic activity is going to pick up. Secondly, we see that credit to services is beginning to pick up.

One of the key factors which will determine how strongly growth will come back is how much money the government can put in the hands of the average citizen. By this, I don’t mean the citizens only at the bottom of the pyramid. In terms of opinion-making and ability to spend capital, the activity always starts from the top to bottom. The sentiment, too, starts from top to bottom. If income tax benefits come in across all categories of people you could see a feel-good factor come in, which is a powerful precursor to any demand pickup across the globe. If income tax cuts are announced in February’s Budget, I think that will provide a lot of impetus given that we have already received a supply-side boost by cutting corporate tax rates. So, these two things can revive economic activity in a meaningful manner.

What are the few things that the government could consider doing to clear certain bottlenecks that have impacted growth?
Approaching this by spending on infrastructure and causing fiscal deficit is not the right way of doing this, given two reasons. First being that the impact of infrastructure spending takes a prolonged period to take effect. What we need is more of a boot or catalyst, not something that takes over 15-20 years to play out. Secondly, while infrastructure spends by the government are good in the long term, the marginal impact of a massive infrastructure spend on steel and cement is relatively low given the size of these sectors today.

We believe the government has the right idea, however, needs to spend the money judiciously by cutting income tax rates and putting more money in the hands of the people across all segments. Consider the economy as a ship that has developed two holes; one being real estate – which is the most dominant sector in any economy across the world – and the second is NBFCs.

We need to have a focused, time-bound resolution plan around these two segments, which goes beyond trying to address the demand-side problem in real estate. We need to find a way to get builders back on their feet. We need to change perception in banking and non-banking circles about builders and developers and their credit worthiness. Till we manage to do so, setting this ship upright and on course, would prove to be difficult. Adding more power in terms of spending, will not add more speed to the process of economic revival, unless we restore balance.

Do you see any hope for the mid and small caps?
Our sense is that mid and small caps will revive, and the triggers are going to be led by the pickup in economic activity and change in the current negative discourse. We must also realise somethings have gone right but have their own gestation period.

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