Look beyond the Exits

A vibrant domestic growth will hedge uncertain global markets

“Rexit” and “Brexit” hit the Indian markets by surprise. In the recent period, even with these events, Indian equity market has been the most resilient amongst the global markets. The benchmark index NSE Nifty has outperformed other global peers by 3 per cent and more.

This is not surprising considering the policies undertaken by the government, improving high frequency data points and positive news flow.

The after-effects

Our take on Rexit is that Raghuram Rajan has laid a strong foundation for the economy by prescribing a sound monetary policy.  He has also made a lot of progress on non-performing assets (NPA) to heal the banking system faster and improve banking penetration through new licences.

There is no doubt that Brexit will unfold over the next few months. There will be volatility in asset prices, especially due to the adjustments in currencies. The UK could see a recession and Europe could slow down further. The slower world would result in lower commodity prices and further postponement of rate hikes in the US. Though we export only 3.4 per cent of our total exports to the UK and are a major beneficiary of lower commodity prices, we are not completely immune to the excess in markets.



 Domestically, things are looking up. The economic high frequency data points suggest recovery in some pockets. The sales of two and three-wheelers have grown at 13.8 per cent and 28 per cent (3 month moving average yoy) respectively. Tractor production has seen double-digit growth. The strong growth of medium and heavy commercial vehicles continues for 20 months in a row. The four core industries — electricity, cement, fertilisers and refinery products — have clocked double-digit production growth. The value migration towards domestic air travel continues with passenger growth of 23 per cent, a double-digit growth for 21 months in a row.

Positive developments

We have to be cognizant that there are some data points which have been laggards, like IIP, deposit growth, credit growth, and railway traffic, among others. However, there is enough happening around which should see these data points improving.

First is the monsoon. IMD and Skymet are predicting above-normal rainfall for this monsoon season. While the start has not been good, with the deficit rainfall at 16 per cent, it is too early to judge. There is widespread expectation across the world that the La Nina effect would bring in more rains not only for this season but also for the next few years. This will provide huge respite to the rural economy, in particular, and broader economy in general.

 Second, the steps taken by the government to ease doing business in India. The Bankruptcy Bill passed in Rajya Sabha should help in establishing a transparent and time-bound process for failure of businesses. The National Capital Goods Policy approved by the Cabinet strives to create an ecosystem for globally competitive companies in the sector. The changes announced in the Foreign Direct Investment (FDI) policy in sectors like Defence, Pharma, e-Retail, among others, would make India more investor-friendly. The government has reached out to all parties to get the Goods and Services Tax (GST) Bill passed in the monsoon session of Parliament in July. The passage of this Bill would be a huge boost economically, and in terms of positive sentiment.    

 Third is the implementation of the Seventh Pay Commission payouts. The increase in amount in the hands of Central government employees is over ₹1 lakh crore, which will boost consumption. In due course, the State and Public Sector Undertaking (PSU) employees will get more money in their hands just like their Central government counterparts, which is another leg-up to consumption.

Earnings picture

Fourth is the holy grail of investing — corporate earnings. The March quarter has been a good one after seven quarters with both EBIDTA and Adjusted PAT growth QoQ at over 12 per cent each. The earnings have closed flat for the year.

Let us remember that FY16 has seen slowdown in domestic activity, disinflationary environment, cross currency impact, fall in commodity prices and inventory losses, causing a severe dent in corporate earnings.

Moving into the new fiscal year, the recovery of commodity prices is already in progress, there has been an increase in government expenditure, increased consumption — in both rural and urban regions — and lower interest outgo due to transmission of rates would see pick-up in earnings. Our base case is 13 per cent earnings growth in FY17.  The broader markets, especially in sectors like discretionary consumption, private banks, cement, metals and NBFCs, are providing investment opportunities.

The next few months may see news about Grexit, Departugal, Italeave, Czechout, Franic, Oustria, etc. This might cause volatility in the markets which domestic investors must take advantage of, keeping their eyes on their long-term goals.  

The writer is Co-Chief Investment Officer, Birla Sun Life Asset Management Company

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