Expect Populist Policies In Budget Ahead Of 2019 Polls, Says Anil Ahuja
Bank recap to provide respite from the capital constraint helping PSU banks play a little more aggressively.
Second quarter earnings have largely been in line with expectations, which indicates that the downgrade cycle may be coming to an end, according to Anil Ahuja, chief investment officer at IPEplus and Asia Star Funds.
He sees value in public sector banks battling with credit constraints, especially with the government Rs 2.11 lakh crore recapitalisation plan, he said on BloombergQuint’s weekly series Thank God It’s Friday.
Here are edited excerpts from the interview.
What have you made of earnings so far? Any bright spots that you have seen?
This time earnings season has been quite in line with what was expected. So, I don’t think there is much to write home about. But the good news is that there haven’t been major slippages other than a few extra non-performing asset recognition by the banks. Other than that, I don’t think there has been any significant out-of-line behaviour which means hopefully, the downgrade cycle that we have been seeing from the last couple of quarters should stop. I am pleased that, at least, the cycle of downgrades is coming to an end.
Resurrecting PSU Banks
Anything that gives you more confidence in PSU banks or would you rather stick to the retail-oriented private banks even after seeing the early numbers?
I have maintained that there is probably value in the PSU banks and they have been hamstrung by the lack of capital in terms of being able to lend and participate in the overall growth of the retail financing business, both in auto and hard goods as well as housing finance.
But with this new injection of Rs 2.11 lakh crore, I think there will be a respite from the capital constraint. That should allow the PSU banks to participate and play the game a little more aggressively. So the field will get a little more even between the PSU banks and private sector banks and NBFCs.
Consumer Stocks: Valuation Blues
How would you read the consumption theme, given the valuations of the companies in this sector?
At this point, the opinion or the market is divided into two distinct camps. One camp is says growth is here to stay, the trend is strong, and everything is fine, which would struggle to justify the valuations. The other camp is the ‘but’ camp, which thinks if growth doesn’t come and if we have a repeat of what we have seen for the last couple of years, then we have a serious problem on valuations. Valuations are stretched.
So your choice is between – fairly valued or are they really stretched. I don’t think there is anybody in a camp which says that the valuations are cheap or reasonable. So we are dealing with a market that is expensive. The question is, is it really expensive or is it just fairly valued?
Favoured Themes
Is there any sector that you are wary of right now and you will definitely keep away from?
That’s a difficult question to answer. I would rather tell you the sectors I am more comfortable with, and then you can avoid the others. In my view, the big play is essentially coming from the consumer sector. We have not seeing signs of corporate investments. So the consumer growth is definitely worth playing which means that NBFCs and the private sector banks will continue to deliver reasonably good numbers. Which also means that with the new capital injection, the public-sector banks should be able to participate in that game. You have got the auto pack, other white goods which will also benefit.
I think the infrastructure and related sectors should also benefit with the amount of money the government is throwing into rebuilding or construction of India or the construction of the housing sector – whether it is big construction companies like Larsen & Toubro or plays like cement, etc. which should benefit.
End Of Rate Cut Cycle?
How about the rate cycle in India? Have we reached the end of the rate cutting cycle, or are we in a period of lull?
I think so. The rate cutting cycle will take a breather. I know there is a lot of noise, pressure and demand for rate cuts. But I don’t think rate cuts can be justified on the basis of numbers that we have been seeing at this point.
If public sector banks start to lend, and if there is a minor pick up on the corporate investment cycle, then rate cuts are off the table for some time.
Liquidity Rush To Turn?
At what point in time, do you think this liquidity ceases and people start seeing the real sense of value if there is any at all? How are you reading this?
I don’t think the liquidity which is coming into the market is looking at valuations. I don’t think liquidity is sophisticated enough to understand valuations and the levels which we are trading at today. I think that liquidity is being pushed by aggressive messaging that is coming from the mutual fund industry which takes ‘X’ percent of money and sticks it into equities and it doesn’t matter for the price because you will go invest for the long term which is fine.
As long as the markets keep performing, that money will keep flowing. It will take a shock of maybe 10-15 percent which is pretty meaningful to cause that liquidity flow to change because so much of it is coming through SIPs and it is difficult to turn that tap off easily. So, you need a major event or some shock which will cause that liquidity flow to slow down.
Eye On 2019 Polls
How would you expect the government to play its cards in the race towards the elections in 2019?
The government has to play some kind of populist card in 2018 Budget. They have taken a bunch of hard steps in the last four months. What we expect to see in the next one year are more populist policies. That’s how I would see February-March 2018 budget.
Where Is Oil Headed?
Are you worried about the rising crude oil prices which have now crossed $60, and do you believe that the price will sustain because that could have implications for meeting the fiscal target for the Indian government?
I am not a believer in a sustainable high crude price because there is so much capacity that comes on as soon as prices get to level. Actually, at $ 60, a lot of the capacity in the U.S. will start to come back to which we are already seeing signs of. I don’t think that oil prices will remain elevated for very long. I don’t think it will go higher from where it is right now. I expect it to be lower in 6-12 months.
The Cryptocurrency Debate
How are you viewing the debate on cryptocurrencies being treated as an alternative currency?
It is a subject that interests me and I have spent a lot of time understanding and learning about it. But it is a whole different paradigm. If you sit in the current world paradigm which is the paradigm of money and the paradigm of the government issuing money, it is very difficult to understand the cryptocurrency world. But if you are willing to make a shift to the other paradigm, an alternate paradigm entirely, where you think of cryptocurrencies as gold. If you think bitcoin as gold...today if you have gold in your pocket, you could walk across and trade it with anybody you wanted to. Nobody would ask you where it came from or where it was going to go. You could carry it from Mumbai to Dubai or New York and you could exchange it at value. Realistically, no government has a record of it and you don’t have to explain it to anybody and it is completely anonymous.
Why does gold have value? It has value because of you and I agree that it has a value. There is no stamp of the RBI saying, ‘I promise to pay the bearer of this coin.’ If you accept that paradigm, a whole new paradigm starts to fall into place, and it makes a lot of sense. Will it get accepted or whether it succeeds or not, but it is a whole different ball game. With bitcoin being accepted as a commodity, and starting to trade on the CBOE, I think that will make a big impact on future of this stuff.
Bitcoin has undergone this process of forking. And November 16 there will be an event, by which we should see bitcoin fork. This time it may result in two completely different blockchains. What are your comments on this?
The single biggest issue with bitcoin is its ability to scale in terms of a number of transactions per second. There are long waiting lists. There is a huge issue in terms of scalability because these are distributed ledgers and their records have to be mirrored across all of them and there is a huge consensus process which means it gets very slow. Theoretically, you could probably do 7 transactions per second across the whole world, which makes it a very inefficient product for transacting business. Seven transactions per second...Visa can accommodate 10,000 transactions per second. So, it is not on the right scale.
The forking and the creation of other cryptocurrencies are happening because you need something that is scalable. You need a different model of being able to agree on whether something is right or wrong. And there are multiple attempts being made at resolving the issue of scalability. The forking is a bonus issue. Like if you had a company and it splits into two, you get one of each and you carry on. Which one creates more value doesn’t matter.
The transaction is visible to the whole world. The fact that somebody bought something at a certain price, or something being transacted is available and visible to the whole world. What is not available is who bought it. In today’s world of KYC or anti-money laundering, governments trying to figure out which dollar came from where and went where I am not sure the world in its current form is ready for that anonymity of transactions.
Fed Policy To Remain Unchanged?
Most don’t expect the trajectory to change as Jerome Powell being appointed as the next U.S. Fed chairman.
Jerome Powell’s appointment is essentially Yellen in a slightly different form. But the policies are unlikely to undergo any dramatic shifts.The process of normalisation has already been put in place and there might be minor tinkering which could be speed it up or make it slower. But I don’t think that will change. If you have been listening to what he has been saying over the past 12 months, his views and Yellen’s views have been very similar which means that he is not an outlier and he is in consensus with what the Fed is doing so far. So, I am not expecting any dramatic shift in Fed policy or direction.
As of today, the world is awash with liquidity and out of the four big banks, two have signaled that they are going to start moderating that liquidity flow. The moderation from the U.S. is very small and I don’t think that it will make a big difference immediately. But that is just one out of the four. The ECB is still going to continue to pump money in although at a slightly slower pace. But they’ve run out of bonds to buy. So they have a whole different problem. In that situation, we will not see the impact of that action until the second or third quarter of 2018. We are almost a year away from seeing any impact of that. Japan is not slowing down in the near future and I don’t think China has made it clear that how will they deal with their own financial issues because they have plenty of those as well. So no immediate stress.
Watch the full interview here.