Sanjay Dutt, director at Quantum Securities, has more than on decade of stock brokering experience on the BSE and NSE. He has practiced as an Independent Accountant (CA) and is a Fellow Chartered Accountant from The Institute of Chartered Accountants of India. Dutt is an alumni of The Doon School and has done Management Education Programme from IIM Ahmedabad in 1992.
He believes that 2019 is going to be the year for emerging markets and for India, fundamental reforms have fallen in place. On banking sector, Dutt said PSU banks may start seeing better lending practices and recovery in non-performing assets (NPAs) and reforms in state-run banks are missing despite capitalising them. Edited excerpts
For the last few weeks, I am clear that we are going to move along with the emerging markets in 2019.
Q: What is your sense, are we over staying to welcome the bulls or do you think we are on the start of genuinely some big growth period? My very well researched and considered view is that 2019 is going to be the year of the emerging markets and more so.
Taking India, if we look at how dynamics have played out, we have had huge outflows in 2018, close to in the range of about $40 million or nearby is what domestic liquidity and domestic investment savings have supported the market.
We haven’t followed off the cliff, with such massive outflows. Now in 2019, we are going to get some more inflows, which are reasonably sure in the emerging markets as the way mature markets now are more or less plateaued out and are having their own problems of slow down and various other trade war issues etc. We being a more internal market in terms of having very strong domestic growth itself and not dependent on exports or the international markets, would be a natural choice for investors worldwide to deploy money.
I think overriding reason why I think India is poised for a very good year or two ahead is some of the fundamental reforms that are falling in place. Forget the fiscal deficit has become 117 percent or what it was etc. that is all this 3-6-12 months’ kind of an adjustment. But as an investor, if you look back some of the structural changes that have been done starting from the United Progressive Alliance (UPA) government and carried forward by the National Democratic Alliance (NDA) government whether it's oil pricing, subsidy issues and pricing, now no one blinks an eye when fuel prices change every day versus earlier. The Goods and Services Tax (GST), Insolvency and Bankruptcy Code (IBC) and non-performing assets (NPAs) are more or less absorbed and dealt with. I am not saying they have all been sorted out, but they have been absorbed and dealt in balance sheets, corporates have tightened themselves and I am very confident that the next two to three years are the year for the equity investors.
More importantly, if you look at anecdotal sentiment, today is worse going into the New Year what has probably been in the last 5-10 years. After 2008-2010, this has been the worse December, where the sentiment going into the New Year, so we are kind of well positioned to deploy our money at this point of time.
Yes, we are seeing volatility as Dow and other things will be out in the next few weeks or a month or two. We are on tract for fundamental shaping up better, earnings shaping up better, so a mix of this is going to give us a very good investment horizon for the next two to three years to deploy money.
I agree with you and I think there is no one better than you who looks at this sector and really has the pulse of this, particularly in auto, hearing and understanding the analysis. However, I think what we are seeing is a short term phenomena and we are seeing this in pockets, where we are having problems. We were bound to have these as we could not have month-on-month numbers going on for three to five years. We could not have Eicher Motors or Maruti or something just carrying on at that breakneck speed. We needed a pause and whether that pause came in, since liquidity tightened or consumer sentiment came negative in the last few months or because of internal political and other dynamics that we had here. That was mainly led by some liquidity issues, some fear that the economy and actually on ground economy having going slowed down in the last year or two, we have seen the numbers wherever you say it was because of the long tail of the GST impact or demonetisation impact but like I said most of that has been absorbed now.
Q: I think the only argument to that is the fact that consumption growth was expected to be the main driver for this market in the last two years and now we have seen a genuine slowdown there. If you talk about autos, we hear that dealer inventory levels are as high as 12-13 weeks right now and there is definitely a talk of some slowdown especially in rural, etc. How would you deal with that piece? Autos may not immediately revive in the next 3-6 months, but I think consumption story overall is robust.
You look at some of the other companies, they are coming out with reasonably good number, whether they are FMCG companies etc. and they are all projecting next year to be good year. So they would be pockets of problem. Auto, as you correctly pointed out, but it's a transition phase or this 3-6-9 months that we have kind of wear out the inventory, companies will adjust.
Actually, I wanted to have a longer talk on autos, but we will have it some other day, because I see a different dynamics playing out for industry there in terms of 5-10-20 year vision and that is why things are little problematic for them. Consumption is still intact than getting into the real details of some of the sectors that are actually seeing a change in the business model more than anything else.
I accepted the fact and every economist will accept it that there have been problem, whether it's the long tale of GST impact or whatever it maybe there has definitely been a problem in the last 6-12 months. Maybe even this quarter is not going to be good for most of the companies, but I think that is reflecting in the prices and why we are seeing such negative sentiments.
Q: The other sector aviation, even over there after months of fairly good performance of 15 percent passenger growth, we have begun to see two consecutive months of 12 and then 11 percent passenger growth. So, when we connect these dots, we worry about consumption. Do you think that too is a passing phase? We are actually now discovering value in lot of sectors and lot of conviction buys is primarily because of that.
I think that story has played out and we need to start looking at FY20 numbers. We need to start looking at the fact that there will be more than Rs 100,000 – 150,000 crore of liquidity coming into the system, because of the Open Market Operations (OMO) announcements and the possibility of rate cut in India in February and also the western world money coming back into India. We had a report that FIIs think India is the top destination over a 1-2 years. So, I think things will start looking up for everything and in an election season, normally consumption starts to pick up, because there is a general spending in the economy. It does act like consumption trigger also.
Q: This year IT has been the big leader, almost 30-40 percent gains for these stocks, which pocket could be the leader in 2019?
The big story for the next year or two is going to be capital goods, followed by PSU banking, insurance and healthcare. If we have this universal basic income concept coming in, it will spur consumption. Ultimately, it will give disposable cash in the hands of people at large, mainly in the rural areas. All these things will lead to spending that actually goes to the most important sectors, which are critical for our own existence like healthcare and basic consumption. We will be cutting our budgets in healthcare and insurance. Pre-election many contracts will be awarded and capital goods and infrastructure led sector will be benefiting it. Other than theses sectors, auto companies are going to be robust again.I said PSU banks as it's a contrarian play in my opinion.
Good quality PSU banks had been written off by market and investors.I think there is big play in there as whatever we will get FY20 onwards, are going to be primarily write backs. I don’t think any chairman of a PSBs sitting with any NPAs is hidden in any manner. I think he is more than adequately provided and is reflecting a true picture of his book as no one wants to carry anything that is hidden and then get a rap from the RBI. So the only thing you will see in PSU banks is better lending practices and good recoveries coming in. So, these 3-4 themes are going to be very good for FY19-20.