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Not a bear market, we are in a period of volatility; keep away from defensives: Sunil Subramaniam


“The allocations that you make to the potential for growth and that the growth should come from domestic focus. Those are the things I would overweight on in our portfolio today. I should be underweight on traditional defensives like IT, pharma and FMCG,” says Sunil Subramaniam, MD & CEO, Mutual.



It is a little worrying to see how the market is panning out just a day ahead of expiry. I understand that it is a 9% OI build up on the Nifty, indicating that a lot of short positions ahead of the policy outcome tomorrow?
Yes, rate hike is almost certain because the RBI Governor himself said there will be a rate hike and the only issue is the quantum of the hike. Then, one would want to know what they are trying to do on the liquidity front and the forecast for inflation in the coming quarters which will give a sense of future RBI policies. There is a lot at stake tomorrow and naturally the market will be a bit nervous ahead of that.

We know rate hike is coming, we have seen the out-of-turn first rate hike coming in May. What quantum will disturb the market?
I think it is more than just a rate hike, I do not see RBI going more than 50 bps. So, if they do a 75 bps hike, it will be a big shock to the market. I do not expect RBI to do that but I think it is about the commentary on the future. RBI gets a lot of data on hand which the market is not privy to. RBI gets a lot of forecasts, they get consumer survey data in terms of forecasted inflation and that is the key.

The second is the news on the monsoon. We rely on climate and if it is a good monsoon then that is good news. So we have to see if RBI makes a comment about that in the data that they have.

Third, as we know, RBI and the government have been working hand in hand and the RBI has been able to influence the government to take some of the burden of inflation on its shoulders. We saw that in the petrol and crude excise cut. The RBI has generally been very supportive of the government in terms of promoting growth but the government now wants RBI to support it more on inflation than growth.

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If the balance is decisively tilting towards inflation for the coming quarters, than that is not something the market would like because cost of funds for all participants goes up; consumption gets hit because of rising EMIs and at the same time, the nascent growth recovery starts to cool down in terms of forecast. So it is a commentary which is more important than the absolute rate hike and if that is where the deliberations of the MPC in terms of what we can expect in future, policies are probably more important than what happens tomorrow.

India’s contribution to the global market cap of equity markets is at a decade high 3.1%, India is in the top five global markets as well when you look at market cap. This market cap increase has also been thanks to recent IPOs like , , Delhivery, , . One wonders are we in a bear market rally or a bear market trap? How to make sense of it because this is certainly a rise with India moment but how do we discuss Indian equity markets?
I think you got to read this in conjunction with the fact that we have overtaken Japan GDP in terms of the size of the economy. So, it is not just the market; India is occupying an increasing space in the world economy-wise also.

Coming to the point of whether we are seeing a bear market rally, there is one clear thought process that everybody must bear in mind right is that none of the news of things happening across the world are good –be it the Russia Ukraine conflict, rising inflation in the US and the hike in rates, high oil prices. But the fact that Indian GDP growth rate is going to be in the high single digit is not in question. Then why is the market so volatile? It is volatile because of the liquidity factor.

If you look at it from the liquidity perspective, because of oil we have seen bearing the brunt of the FII outflow in an emerging market space. However, there continues to be a huge premium to the emerging market in terms of its forward outlook. So there are short term FPIs and longer term FPIs. I do not see any move from longer term FPIs to remove allocations from India. It is the shorter-term hedge funds who rely on borrowed money and hence are looking at the carry trade and are pulling the money out.

So, for me, the current situation is reflective of a short-term knee jerk reaction of a set of FPIs for whom minor changes in inter states and currencies deeply affects their portfolios.

From the India perspective, we can ride this wave. Inflation will rise in India due to imported inflation right but remember in our CPI, almost 45-50% is food and only 10-15% of our food is imported. So domestic food and hence monsoon is the key for the short-term outlook,

In the longer term, according to the new defence policy, today about Rs 76,000 crore of capex is happening. The government is doing a lot to support supply driven GDP growth. It is the demand side which is not working yet. The pandemic has made sure that the number of summers have gone past but the consumption industry is yet to pick up but the supply side growth of India is on a fairly firm footing due to three aspects; one, the government spend is through either defence or infrastructure.

Second, the PLI announcement means that all those factories being set up will lead to some capex and support growth.

Third, despite consumption not bouncing back, capacity utilisation in India is back at the long term average of about 72%. So for corporates, in the short term, their demand is not picking up to the extent they expected. For me, that story is independent of all the Russia-Ukraine conflict or anything that is happening in the world.

India is firmly on a supply-driven GDP growth. If demand comes and supports it, we could see it getting closer to 9% in GDP growth in a couple of years from now. For me, a bear market essentially reflects an economy slipping into recession. That is far from the truth and for me, this is a period of volatility because of the flows and because of the news and not a bear market as such.

I do not see that the economy is in any position to go on a downtrend in terms of recession. There is fear of stagflation which is stagnant growth with rising inflation. In India, growth is going to stagnate at 6.5-7% if at all it happens and not at the 2% or 1% of or slipping into two quarters of negative GDP that the advanced countries are expecting.

Our stagnant growth itself is the fastest growing nation in the world. I think that we need to take a perspective around the fact that nominal GDP growth of 12 to 15% depending on where inflation ends up is something that is going to make our absolute GDP grow and the stock markets ultimately will recognise that. So, I would not like to call this a bear market. I would like to call this a volatile market while global uncertainties play out.

Ultimately for the market to respect earnings growth from the Indian economy, reality will come in and support it and DII flows are being allocated in those and that is why we see that the market corrections are a little deeper because the DIIs are not necessarily buying everything that the FIIs are selling. FIIs are selling what they already bought which was safety, which was essentially IT, pharma, FMCG right. But DIIs are buying a broader Indian space.

In your top sectors, IT has got a contribution of 8% and financials is nearly 29%. Are you expecting IT to outperform in 2022 but when I look at this I see you are relying more on banks?
Yes, absolutely because we believe that banks being a large part of the market cap, larger market cap play right in the Nifty 100 and Nifty 50 are naturally facing some selling pressure because FIIs are selling across the board on the largecap but from a Indian growth story perspective, the banking sector is critical for supporting the Indian growth, not necessarily the same flow of IT. For us, any selling in good quality banks is a good opportunity to buy. Our bullishness around the BFSI space right remains because of the domestic centricity of that entire space.

Where do you stand when it comes to classic defensives like FMCG or even IT and pharma?
We are underweight in these spaces because normally safety is defined as IT, FMCG in the space and in volatile times, one tends to go to safety but in the current situation, I do not think safety lies in safety, rather it lies in growth. So, broaden your allocation with the domestic focus across the space. I would still say consumer discretionary, housing and real estate, auto, capital goods cycle are the spaces one should be accumulating on dips rather than go behind the traditional safety because today the safety lies in the future growth.

The allocations that you make to the potential for growth and that the growth should come from domestic senses and so IT could have growth if the US economy recovers but that is a big if. I would say to keep a domestic focus in mind. Look at where all this government spending is ultimately going to realise in terms of order books and downstream things. Those are the things I would overweight on in our portfolio today. I should be underweight on traditional defensives like IT, pharma and FMCG. I do not predict how much more FPI selling can happen and if that happens, these safety stocks will correct even more.



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