Neelkanth Mishra, managing director and India equity strategist at Credit Suisse in an interview with CNBC-TV18 shared his views and outlook on Indian market strategy for 2020, global markets and the link between domestic market and domestic economy.
According to him, most all of the improvement in the US market in 2019 has come from the change in the price to earnings (P/E) multiple, so the earnings per share (EPS) hasn’t moved much that is the forward EPS. So there is a global angle.
"Given that equities are truly global asset class, we have to look at what global multiples are at. Within India as well, I think it is important to remind ourselves that the domestic economy and the domestic market are not as tightly linked as we think,” he said.
“There are private banks, which keep growing which have cleaned up their balancesheets, their earnings growth is in the high teens or in the 20s, there are companies, which are gaining market share, there are companies which are linked to global dynamics and less than a fourth of the domestic marketcap is directly linked to the domestic macro," he said, adding that one needs to be very cautious when extrapolating domestic weakness to the domestic market.
“Over the past 15 years, there has been a reasonable correlation, directionally at least, on how real gross domestic product (GDP) growth affects the P/E multiple in the market. Although, in the last 12 months, we have seen some kind of disconnect but so long as there is a medium-term hope that in the next 12-18 months we will go back to 6.5-7 percent growth trajectory, it is easier to understand why the multiples are there,” said Mishra.
According to him, what is happening in telecom is also unrelated to what is happening in macros. "We think, it will be a three-player market and if it is, then it is unrelated whether economy is slowing down or not," he added.
When asked what he wanted the government to address in the upcoming budget to push demand, he said, “Prescriptions are very dangerous when you are in the market. So desiring what needs to happen or prescribing what needs to happen from a policy perspective is something that can drive errors when you are in the market. You need to be focusing on what is likely to happen. So, from that perspective, till we get interest rates down - the interest rates are now showing up as a problem area for almost entity in the economy."
"The central government’s debt to GDP is 45 percent. The cost of debt has been flat at about 7 percent for the last couple of years partly because they have increased duration but if you were do the multiplication, it is 3.15 percent of the GDP. So, the interest cost is 24 percent of government expenditure, in the last two years it has been about the third of incremental expenditure and there is no way that the government can now generate a primary surplus especially given what is happening to taxes. So we need to get interest rates down.” “They may not help in the first year but if the nominal GDP growth is slowing from a 13-14 percent trajectory, which everyone was used to, to maybe a 9-10 percent growth because inflation is down, we need to get interest rates down,” he further added.