imgbd CEO Speak

Get ready for a secular bull run

Nilesh Shah, Managing Director, Kotak MF

22nd November 2016

In a nutshell

Demonetization can leave a deflationary impact over the next 2 quarters, which will affect many sectors in the near term. But, Nilesh asks us to look beyond, to understand the deep structural impact that GST and demonetization will have on our economy over several years - an impact that will set the tone for a secular bull run in the years ahead. He is not too worried about disruptions to international trade from new leaderships in the US and UK - as he puts it neatly, "the rhetoric of election is different from the practice of governance". Read on to get the master thinker and orator's perspectives on recent game changing events - domestic and global - and their implications on our markets going forward.

WF: We seem to be living in a season of black swan events - globally and locally. Taking the global scene first, we've seen Brexit and now the US election results. There is clearly a lot of social unrest in the Western world. In what ways do you see this impacting global trade, fiscal and monetary policies and therefore global markets in the months ahead?

Nilesh: The rhetoric of election is different from the practise of governance. Any which ways, it is too early to speculate on how the policy will take course.

US & UK have been early and faithful proponents of globalisation and free trade. So, it is not that they are going to pull out from those ideas and concepts which in many ways have been foundational to their growth and being. The painful learnings of protectionism and isolationism of the early 1930s may not be lost on their policy makers as well. Having said that, even the new regimes in London and Washington DC realise that their economy is highly integrated with the global finance and trade. And artificial barriers may only disrupt their own economies. So, while it may be likely that the US & UK may take an aggressive trading posture, yet they may not alter the global structure significantly.

WF: Back home, if you were to view GST implementation together with the impact of demonetization of high value currency notes, what medium and long term implications should we draw on impact on our economy, on sectors and on markets?

Nilesh: It looks like the timing and the sequencing of JAM (Jandhan-Aadhar-Mobile banking), the passing of GST through states co-operation and the demonetisation were well-timed to achieve financial inclusion, financial integration, and financial probity. So in the near term, we may see cash based transactions decline significantly. As a consequence, cash dependent sectors such as real estate, jewellery, consumer discretionaries, furniture, luxury services, building materials etc may see a decline in their revenue and income. This may have a spillover effect on other dependent sectors.

However, as the idle cash money flows into the banking system, the banks would either allocate that to bond market, or would be pushed to take risk and increase credit offtake. In both circumstance, the interest rates in the economy will come down. In the same phase, the RBI may stand to gain from extinguished currencies that are choosing to not reveal itself before 30th Dec. These gains may be paid back to government, who then can utilise these funds towards infrastructure spend. Moreover, the reduction in currency circulation may lead to deflation in prices, which too would provide space for rate cut and also increase the real income in the hands of the common people.

Therefore in the medium to long term, as the prices correct, and as capital becomes available at affordable rates, we may see increased and efficient capital outlay for production and growth. In this phase, banks may be at the forefront of activity and growth.

WF: Since we are in a season of black swan events, we now have to train our minds to expect the unexpected, to challenge status quo. What aspects of status quo - locally and globally - in your view are up for a serious challenge in the months and perhaps years ahead?

Nilesh: Speaking only from point view of economics and finance, these changes may manifest over a longer term period of 1-2 years or more. Crystal gazing is a highly inaccurate undertaking. But I guess easily replicable and iterative processes may get disrupted by technology over long term. Energy sector may see new and more efficient avenues. Solar may increasingly become economical.

WF: Do any of recent events alter your medium term view on Indian equity and debt markets? What is your outlook over the next 1-2 years?

Nilesh: GST and de-monetisation are events that not only are historical, but will have long and deep structural impact for years and decades to come. Having said that, the combination of these events have led to revision in many investment strategies but I don't think that the bullish outlook on India has changed. We may see market volatility for 1-2 quarters as the deflationary effect of de-monetisation, US Fed rate hike and Italian debt crisis issue unfolds. But as the domestic capital and land becomes cheap, the productive and enterprising activity of the nation will kick - in putting us on path towards a secular bull run. Investors are advised to invest through SIP and also apportion some capital for opportunistic buying at dips over this horizon.

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