Indices often don’t tell the full picture, said Ashwini Agarwal, Co-Founder and Partner, Ashmore Investment Management India LLP. The statement was given by Agarwal in an interview he gave regarding various financial matters. Here is the full detail of the interview.
Q: We are at all-time highs, does this make you uncomfortable buying or do you think the earnings have proved a point and therefore it is good to buy these levels?
A: Indices often don’t tell the full picture. If you look at the index and you breakdown the performance of the index, it has been held up year-to-date by a handful of stocks. There is a large number of stocks in the largecap index as well as in the midcap and the smallcap indices which have done quite poorly. So the question to my mind is that this market is sort of giving you a lot of opportunities from a stock picking perspective because there are a lot of stocks that are down, earnings are coming through, valuations are reasonable and of course there are some global risks on the horizon, there is politics in India and you have to deal with all of that but on the whole, I feel quite excited.
As I had mentioned before in the early June, conversation that we had that I feel more excited and I find more opportunities today than I was finding six-seven months ago, I think that one shouldn’t get phased by the all-time high of the index and one should focus a lot more on individual stocks and where the opportunities lie.
Q: What makes you so optimistic, are you seeing a recovery in earnings and if yes, what kind of earnings growth are you pencilling in for the markets or for the Sensex over the next one-two years?
A: If you look at the Nifty, for Nifty, we expect an earnings growth, which is a little over 20 percent for the current financial year, next year is still of course a little bit further away but if you pencil in estimates that sound reasonable, you should still get to about 18-20 percent next year as well. Big driver of the earnings this year is going to be the industrial banks where we are seeing stabilisation of slippages in some of the large industrial banks and hopefully the provisioning requirement will start to fall off significantly as we head into Q3 and Q4 of this year.
Domestic consumer continues to be quite strong where we are seeing significant traction in demand, margins have been quite robust. So that should do well. I think even in healthcare, the earnings are starting to bottom out, you might see another quarter or two of pain for one-two companies, which have large molecules that go off exclusivity but I think on the whole for the sector you should start to see a significant earnings growth as you proceed later into the year.
IT services you have seen pretty decent growth. So growth is there. It is not bad, it is very well spread, it is high quality growth, it is not coming from other income, it is not coming from unsustainable drivers, so what excites me is the broad base of growth, what excites me is the strong balance sheets that companies have and what excites me is the fact that business activity is beginning to look up.
Q: What did you say about corporate lenders? Are you impressed that the bad news is over, are you buying the distress?
A: What I said about industrial lenders is that you are starting to see stabilisation of gross non-performing loans (NPL) levels, which effectively means that sooner than later they will get to a point where they are very comfortable on the aggregate provisioning. We have obviously seen some delays in resolution through the NCLT process but as we go forward, I expect that the credit cost will start to fall off significantly.
Q: You are very optimistic on growth but there are people who have come on the channel and said that if you looked at the current year’s especially fast moving consumer goods (FMCG) or consumption growth, it looks great because last year same time was pathetic. For instance, in Marico, same quarter last year was minus 9 percent volume therefore it is 12 percent now but if you do a CAGR over three years, we are where we were in 2016. That is not called growth. What is your answer to that, do you think we are only looking good on a year-on-year terms?
A: You have to look at sequential. You are right, year-on-year makes less sense especially because the base period had a lot of destocking ahead of the start of the goods and services tax (GST) regime on July 1, 2017. So year-on-year makes less sense but if you look at sequential growth, on a broad range of consumer facing businesses, be it automobiles, be it farm equipment, be it consumers, you are starting to see reasonable traction in growth. Now what happens in individual companies is could be a function of how their products opposition is, what the competition is doing and so on and so forth, the point that I am trying to make it that the consumer seems to be in a good shape.
Over the last one year, if you think about it, there has been a significant wage revision for government employees. So that has fed through to consumption but what we are starting to see is a pick-up in investment activity. So if you look at for example, the results from one of the large engineering conglomerates and what they have said about new order inflows and what they have said about order execution, it appears to me that in addition to the government capital expenditure, the private sector capital expenditure has started to pick up.
If you read between the lines of what RBI said couple of days ago, they are clearly indicating that capacity utilisation across the board is picking up, you are starting to see closing of the output gaps. So to that extent, it is reasonable to expect the private sector capex to pick up. So if you add everything together and we have got elections pending ahead of us, we have got the full benefits of the GST still ahead of us, so one has to remain reasonably optimistic about the demand conditions in India.
Of course, what can derail this completely is if the monsoon just rolls over and dies between now and the end of September, that is a risk. Of course, something can happen at a global level, which can throw a spanner in the works on the overall sentiment, international financing exchange rates, yes, all these are risks but as I see things today, I am not terribly concerned that domestic demand conditions are not improving.
Q: Has the view on India from the FII community picked up now compared to what we have seen over the last six months?
A: If you look at the data, the data tells you a story. So if you look at the data between April and June, every week you saw almost a billion dollars of outflows across these three months, net FII outflow across fixed income and equities was close to USD 9 billion.
If you follow the weekly figures for the last three weeks starting with end of June, you have started to see a tapering down of those sale flows. So if the numbers are telling a story, the narrative seems to be that the worst is behind us.
Having said this, large institutional houses anywhere in the world, they are driven by what the underlying client activity is and what the global newsflow is and so on and so forth. So again there are risks globally, which are not completely understood at this point in time. How does the US-China trade rhetoric pan out, what happens to oil? So all these are risks. So I cannot, with a great amount of certainty, say that the worst is behind us but the number seems to tell us a story which seems to be that FII flows are stabilising.
Q: Why don’t you just give us your idea of the global scenario itself or the Ashmore view? Dollar today is 95.2, there is always this fear, every time there is a trumpeting of the tariff challenges, you see the dollar strengthening and all the Asian countries, EM markets especially China going into a cocoon, looking like bear markets, this is a real and persistent fear, some tariffs have already been passed. Would you worry that danger remains for the global equities in general and EM equities in particular?
A: If you speak to Jan Dehn, my colleague, in London who follows global economics and our views on emerging markets are stated by him in various media interactions, his view is that if you fundamentally think about emerging markets today, the balance sheets, external balances, state deficits, fiscal deficits are much stronger than what they were at any time over the last ten years.
So if you think through taper tantrums, take India for example, we had more than 5 percent fiscal deficit, we had more than 5 percent current account deficit, where are we today? Both those indicators are looking quite healthy. So of course there are one-two countries, which are still struggling, be it Turkey, be it Argentina but if you look at a broad spectrum of large emerging markets, they are in a much healthier place than where they were during the taper tantrum years or even through the European debt crisis.
So our sense is one has to focus on fundamentals and the fundamentals of emerging market economies today are a lot stronger than what they have been anytime in the post financial crisis period. So yes, there is a sentiment that is doing a yo-yo given all the newsflow that you spoke about but fundamentally, things should assert themselves in the longer horizon. That is our call. So if you are willing to look through the volatility, emerging market asset should be a good place to be. That is our sense.
Q: Coming back to that consumption argument, one piece of this consumption basket has started to slow down a tad bit, within the auto space, you have seen some of the market leaders like Maruti or Eicher Motors slowdown in terms of their growth rates, is this just because of the base effect, because of the GST transition you had last year or do you see any kind of structural problem in some of these names?
A: We have one month’s data point. We are looking at July numbers and we are wondering if this is a longer-term trend. I would say that let us wait a little bit because what you saw last year was that June sales were depressed ahead of the GST imposition and there was a pick-up in demand in July.
So on a year-on-year basis, there is an effect that amplifies the slowdown. Month-on-month also, you have seen stabilisation rather than growth but I am reluctant to read into one month’s figures and I would say that we have to wait for a couple of months for a trend to emerge.
Obviously, we can make an argument that consumer durable sale should slowdown from here because the wage effect on government employees is behind us and we already have a very high base etc. So one can build an argument, one can build a narrative but on a broad basis, demand conditions seem to be reasonably okay especially on the consumer side and these are consumer discretionary items. I am not worried right now.
Of course, I could be wrong. This is my perception and if data changes then I will have to change my mind. So that can always happen but at this moment, I am not willing to call it the end of the consumer story for now.
First Published: Aug 4, 2018 4:34 PM IST
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