Story outline
- Keep a cool head and do a deep dive to see which cos are going to remain strong.
- Animal spirits actually coincide with the greed element.
- Wholesale banking could come under pressure if NPAs do not stop.
There is a complete fear factor in the market today where everybody wants to avoid taking decisions and buyers actually spending money, says A Balasubramanian, CEO, Aditya Birla Sun Life AMC. Excerpts from an interview with ETNOW.
You met the finance minister on Friday. Was she open to communicating and listening to the concerns of the investor fraternity or was it a routine meeting from which you do not expect anything big?
I would say that firstly, against the scheduled time of one hour, they were quite fair to give us two hours. And second, all the people in the room were…
That is because your list was very long that is why…
Of course, everybody had long list and not only did they give us two-hours time, they gave everybody an opportunity to speak. I found that very interesting. And secondly, they are not only listening, they are also taking feedback and suggestions. The questions were quite obviously around the current regulations -- LTCG and FDI, FPI -- around the regulatory change recently and the disconnect in the market with the bigger markets doing well. Rather, the Sensex is doing well but rest of the market is generally not because the NBFCs have been out of market from the lending side. Unless we actually revive that, how will things actually get better.
And lastly of course, one of the trends that we have seen is that while interest rates have been coming down, the transmission of interest rates has not been happening to the extent it should. All of us expressed the view that there could be two reasons for that. One, the savings rate, which is still being offered by the Government of India through the Reserve Bank of India window still offers close to an 8% return.
Maybe there could be a case for the saving rate to be cut in order to help the banks cut deposit rates, which in turn will lead to lending rates coming down, therefore the transmission could happen. The second part of course is that while the interest rates have been coming down, the large proportion of the interest-rate reduction has been benefiting the bigger companies. Many smaller companies are not getting the benefit because there is a widening of credit spreads below AA and AA+. The spreads have widened and there could be a case for us to look at the benefit of interest rates seeping into most of the small-sized companies and bringing back the credit confidence. These were the points that were discussed.
Yes, one of the points which they understood is that a healthy capital market is important for a healthy financial system. That is something which was acknowledged multiple times. There was no denial that the stock market's reaction actually does not bother us so much and that is something which I think is very clear.
You are saying that stock market's reaction does not bother them or bothers them?
Of course, in the sense that it is important from the capital market point of view, though there was no mention about anything related to that. But I think they were quite keen on listening to the suggestions...
Did she commit to anything when you were making suggestions?
The fact of the matter is paying attention to all the people who spoke for two hours and taking down points is something which I felt is quite good coming from the finance minister. Rest of her team members were keenly taking down all the points being discussed, which was something I found amazing.
Is there panic or is there acknowledgment?
See, there is acknowledgement and there is no panic. Of course they realised the feedback that is coming from people is all very valid and important, and listening itself in my view is an acknowledgment of the fact that things have to get better. They were listening to each suggestion coming from every member of different parts of the financial industry. This is something that in my view could actually help them to come out with some kind of decision which could actually help in boosting the sentiment in the overall market.
How much of the current market is largely driven by sentiment? The fact that the economy is slowing down is not yesterday’s data, it is two-months old.
If you see, the continuous news flows were largely not comfortable from a market point of view. Over the span of these issues -- the NBFCs and then the budget -- month after month we do not get enough good news flows to drive the overall market sentiment. And second, though there have been some resolutions coming for the credit-related issues and again, in the credit market especially, the money at the end of the day it has to be in rotation. If the money is not in rotation despite liquidity being good, it does not boost the confidence of the rest of the market.
Lastly, the US trade war with China actually had its own impact -- one, on the emerging markets and second, with how China has been reacting in terms of making adjustments to the currency. If you look, while our market is down -- there is no doubt it has been for quite some time -- we have actually seen a downfall in the equity market and especially seen a day-by-day widening of the divide between the large and midcaps. The news flow in general has not been that great from a market point of view. I only hope that the current government's reaction and them meeting people actually brings up something to boost the overall sentiment of the market.
The animal spirits clearly seem to be amiss. But as an investor who is looking at a longer time horizon, say the next one-five years, is this the time to get your animal spirits out? Is this the decline that you need to buy?
It is interesting that we measure animal spirits on the basis of the 'bull versus bear'. If you see, crazy buying sentiments prevail, and that gets converted into animal spirits and money comes back. But one should also remember the fact that animal spirits are driven by the consumer sentiment and the buying behaviour of people. When you have more money in the hands of people, they actually go on buying.
As you also buy fear, what I am trying to gauge is whether this is what you need to buy. Is this the opportune time or will the market give you enough opportunity to buy further decline?
Being in the market for so many years, we see there is an element of fear and greed. Animal spirits actually coincide with the greed element. There is a complete fear factor today where everybody wants to avoid taking decisions, whether it is buying stocks or buyers actually spending money. A lot of people even prefer to actually postpone their buying because of some other regulatory changes that are coming in. These are the occasions one must remember the fact of which I am a firm believer -- the price knows everything. Whatever we speak about the issues such as slowdown, etc, the price knows about it and of course, reflects such kind of reaction as we move forward. Therefore, from an investor's point of view and even from a money manager's point of view, we have to keep a cool head and deep dive on companies to see which are fundamentally going to remain strong enough to overcome the potential issues that could come in the future.
Naturally, one has to look at individual stocks even from a broad market point of view. You need to hide yourself in certain sectors which do not get impacted by either a global slowdown or a credit crisis.
Are market men slightly too optimistic on banks, be it private or public? Do you think the big surprise on the negative side could actually come from banks and especially from crowded corporate banks and over-owned retail banks?
The potential risk in the system could come from the new NPAs in certain sectors. So far we have been of the opinion that we will probably see the worst period of the NPAs, and now we will probably see the NPA recoveries coming in post the IBC resolution and we will see the bank’s balance sheet getting better. Having said that, as you mentioned earlier that the segment of retail loan growth moving away from NBFCs to the mainline banking system showed us poor credit growth coming from the banking system. While that could continue if there is a general slowdown either in auto sectors or reduced general tendency towards spending because sub-par agriculture output is expected and we will probably see some bit of slowdown impacting the retail growth. The issue from a banking system point of view -- what kind of incremental NPAs could set in, especially from other new industries -- could potentially impact some of these banks who are actually moving away from retail to corporate now. Of course, wholesale banking also could come under a bit of pressure if the NPAs actually do not stop.
You have touched upon the auto sector that has faced quite a few problems. Was that discussed at all in the meet? If not, what is your outlook on that space?
Of course, while there was a mention of that in our meeting with the group of financial sector representatives, there was also a meeting with the auto sector and the real estate sector. I am sure they would have represented that as well. But in our own meeting there was a mention of the general slowdown in the auto sector as well. They clearly ask of the ministers and others to give three issues regarding the economy and three good suggestions. Most people actually took the liberty of giving suggestions and some of them are implementable ideas. Hopefully they take that forward.
Did you get a sense that stimulus for the beleaguered sectors -- real estate and auto-- is in the works?
Not really. One of the areas the government seems to respect quite a lot is keeping interest rates and fiscal deficit under control, and focus on increased compliance around improving the tax collections. While that is the central theme of the whole budget and the central theme of the government in the overall thinking, it does not look like that fiscal stimulus is actually the way to bring back the economy.
What is the gossip and what are the whispers you are picking up? Will LTCG be rolled back? Will FPI surcharge be rolled back?
Of course, it is difficult to see that. As we live in the market, we have to live with hope given the fact that the market has given a dismally good correction. The overall market echos the same sentiment that the LTCG is not paying much attention. Even we made a point that since the time LTCG has been introduced, the overall market has lost a market cap close to about 14 lakh crore just by keeping the LTCG. Whether it make sense to get collections to the government or does not -- actually it does not because there is no capital gain and therefore, they do not get any taxes -- I would assume that now, or maybe in the coming budget, there is a merit for them to revisit and revive the overall capital market sentiment by looking atthings more closely.
You met the finance minister on Friday. Was she open to communicating and listening to the concerns of the investor fraternity or was it a routine meeting from which you do not expect anything big?
I would say that firstly, against the scheduled time of one hour, they were quite fair to give us two hours. And second, all the people in the room were…
That is because your list was very long that is why…
Of course, everybody had long list and not only did they give us two-hours time, they gave everybody an opportunity to speak. I found that very interesting. And secondly, they are not only listening, they are also taking feedback and suggestions. The questions were quite obviously around the current regulations -- LTCG and FDI, FPI -- around the regulatory change recently and the disconnect in the market with the bigger markets doing well. Rather, the Sensex is doing well but rest of the market is generally not because the NBFCs have been out of market from the lending side. Unless we actually revive that, how will things actually get better.
And lastly of course, one of the trends that we have seen is that while interest rates have been coming down, the transmission of interest rates has not been happening to the extent it should. All of us expressed the view that there could be two reasons for that. One, the savings rate, which is still being offered by the Government of India through the Reserve Bank of India window still offers close to an 8% return.
Maybe there could be a case for the saving rate to be cut in order to help the banks cut deposit rates, which in turn will lead to lending rates coming down, therefore the transmission could happen. The second part of course is that while the interest rates have been coming down, the large proportion of the interest-rate reduction has been benefiting the bigger companies. Many smaller companies are not getting the benefit because there is a widening of credit spreads below AA and AA+. The spreads have widened and there could be a case for us to look at the benefit of interest rates seeping into most of the small-sized companies and bringing back the credit confidence. These were the points that were discussed.
What was the body language like on the FPI surcharge and the tenure change for long-term capital gains tax? Did it indicate a complete rollback of the surcharge or a tampering? The prime minister himself told The Economic Times over the weekend that the government will do whatever it takes to revive animal spirits. Does it seem like they are cognisant of the fact that there has been an exodus of the FII fraternity from equity markets?
Yes, one of the points which they understood is that a healthy capital market is important for a healthy financial system. That is something which was acknowledged multiple times. There was no denial that the stock market's reaction actually does not bother us so much and that is something which I think is very clear.
You are saying that stock market's reaction does not bother them or bothers them?
Of course, in the sense that it is important from the capital market point of view, though there was no mention about anything related to that. But I think they were quite keen on listening to the suggestions...
Did she commit to anything when you were making suggestions?
The fact of the matter is paying attention to all the people who spoke for two hours and taking down points is something which I felt is quite good coming from the finance minister. Rest of her team members were keenly taking down all the points being discussed, which was something I found amazing.
Is there panic or is there acknowledgment?
See, there is acknowledgement and there is no panic. Of course they realised the feedback that is coming from people is all very valid and important, and listening itself in my view is an acknowledgment of the fact that things have to get better. They were listening to each suggestion coming from every member of different parts of the financial industry. This is something that in my view could actually help them to come out with some kind of decision which could actually help in boosting the sentiment in the overall market.
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If you see, the continuous news flows were largely not comfortable from a market point of view. Over the span of these issues -- the NBFCs and then the budget -- month after month we do not get enough good news flows to drive the overall market sentiment. And second, though there have been some resolutions coming for the credit-related issues and again, in the credit market especially, the money at the end of the day it has to be in rotation. If the money is not in rotation despite liquidity being good, it does not boost the confidence of the rest of the market.
Lastly, the US trade war with China actually had its own impact -- one, on the emerging markets and second, with how China has been reacting in terms of making adjustments to the currency. If you look, while our market is down -- there is no doubt it has been for quite some time -- we have actually seen a downfall in the equity market and especially seen a day-by-day widening of the divide between the large and midcaps. The news flow in general has not been that great from a market point of view. I only hope that the current government's reaction and them meeting people actually brings up something to boost the overall sentiment of the market.
The animal spirits clearly seem to be amiss. But as an investor who is looking at a longer time horizon, say the next one-five years, is this the time to get your animal spirits out? Is this the decline that you need to buy?
It is interesting that we measure animal spirits on the basis of the 'bull versus bear'. If you see, crazy buying sentiments prevail, and that gets converted into animal spirits and money comes back. But one should also remember the fact that animal spirits are driven by the consumer sentiment and the buying behaviour of people. When you have more money in the hands of people, they actually go on buying.
As you also buy fear, what I am trying to gauge is whether this is what you need to buy. Is this the opportune time or will the market give you enough opportunity to buy further decline?
Being in the market for so many years, we see there is an element of fear and greed. Animal spirits actually coincide with the greed element. There is a complete fear factor today where everybody wants to avoid taking decisions, whether it is buying stocks or buyers actually spending money. A lot of people even prefer to actually postpone their buying because of some other regulatory changes that are coming in. These are the occasions one must remember the fact of which I am a firm believer -- the price knows everything. Whatever we speak about the issues such as slowdown, etc, the price knows about it and of course, reflects such kind of reaction as we move forward. Therefore, from an investor's point of view and even from a money manager's point of view, we have to keep a cool head and deep dive on companies to see which are fundamentally going to remain strong enough to overcome the potential issues that could come in the future.
So where are you hunting?
Naturally, one has to look at individual stocks even from a broad market point of view. You need to hide yourself in certain sectors which do not get impacted by either a global slowdown or a credit crisis.
Are market men slightly too optimistic on banks, be it private or public? Do you think the big surprise on the negative side could actually come from banks and especially from crowded corporate banks and over-owned retail banks?
The potential risk in the system could come from the new NPAs in certain sectors. So far we have been of the opinion that we will probably see the worst period of the NPAs, and now we will probably see the NPA recoveries coming in post the IBC resolution and we will see the bank’s balance sheet getting better. Having said that, as you mentioned earlier that the segment of retail loan growth moving away from NBFCs to the mainline banking system showed us poor credit growth coming from the banking system. While that could continue if there is a general slowdown either in auto sectors or reduced general tendency towards spending because sub-par agriculture output is expected and we will probably see some bit of slowdown impacting the retail growth. The issue from a banking system point of view -- what kind of incremental NPAs could set in, especially from other new industries -- could potentially impact some of these banks who are actually moving away from retail to corporate now. Of course, wholesale banking also could come under a bit of pressure if the NPAs actually do not stop.
You have touched upon the auto sector that has faced quite a few problems. Was that discussed at all in the meet? If not, what is your outlook on that space?
Of course, while there was a mention of that in our meeting with the group of financial sector representatives, there was also a meeting with the auto sector and the real estate sector. I am sure they would have represented that as well. But in our own meeting there was a mention of the general slowdown in the auto sector as well. They clearly ask of the ministers and others to give three issues regarding the economy and three good suggestions. Most people actually took the liberty of giving suggestions and some of them are implementable ideas. Hopefully they take that forward.
Did you get a sense that stimulus for the beleaguered sectors -- real estate and auto-- is in the works?
Not really. One of the areas the government seems to respect quite a lot is keeping interest rates and fiscal deficit under control, and focus on increased compliance around improving the tax collections. While that is the central theme of the whole budget and the central theme of the government in the overall thinking, it does not look like that fiscal stimulus is actually the way to bring back the economy.
What is the gossip and what are the whispers you are picking up? Will LTCG be rolled back? Will FPI surcharge be rolled back?
Of course, it is difficult to see that. As we live in the market, we have to live with hope given the fact that the market has given a dismally good correction. The overall market echos the same sentiment that the LTCG is not paying much attention. Even we made a point that since the time LTCG has been introduced, the overall market has lost a market cap close to about 14 lakh crore just by keeping the LTCG. Whether it make sense to get collections to the government or does not -- actually it does not because there is no capital gain and therefore, they do not get any taxes -- I would assume that now, or maybe in the coming budget, there is a merit for them to revisit and revive the overall capital market sentiment by looking atthings more closely.
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