3 sectors to gain share over 3-4 yrs: Desai | Economic Times

In financials, big boys are capturing market share both in liabilities and assets. The concentration of performance that we saw starting somewhere at the end of 2018, when the IL&FS episode happened, will continue for the foreseeable future, says Ridham Desai, MD.In terms of the financial sector, do you feel we are far better placed? With regards to NPAs, so far the banks’ commentary has been encouraging but would you still be cautious?I would say there is a risk here. There are two risk factors that India has; one is of course Covid-19. We have done well so far and I am making this comment on the basis of where we are in terms of fatality rates. We have to hold those gains. If those gains go away for some reason, then that will become a risk factor. The second is the financial sector. It does not seem to be out of the woods as yet and I am saying this because credit growth remains quite tepid and the financial sector is not buying into the moratoriums that the government has extended for example to MSMEs. By now they should have. The problem is that in a lot of financials, there is a shortage of capital and there is also consolidation of market share happening. The big boys are capturing market share both in liabilities and assets. The concentration of performance that we saw starting somewhere at the end of 2018, when the IL&FS episode happened, will continue for the foreseeable future. So performance in the financials will get concentrated in the top four or five banks and largely the private sector banks and a couple of large NBFCs. The rest of the sector will probably struggle. That is what is likely to happen in the financials unless we go into a full blown growth cycle. It is the large banks that are able to raise capital and they are raising it. They are bolstering their balance sheets and they are gaining shares in deposits so that they have ability to lend and once that willingness comes back, they are the ones who will corner performance. Healthcare and not just pharma seems to be a no-brainer. Do you think that this is a long-term story at play or would you say much of the juice is already behind us, given that most of these stocks are already at their long-term averages?We are actually at the start. The de-rating in the healthcare sector was severe. It is coming back and there will be an overshoot and until then, it will not be over and a secular shift is likely in both consumption and healthcare because India’s per capita GDP which is currently around $2,000 gets largely spent on basic necessities. Most of Indian households are spending bulk of their income eating food and basic residence and basic clothes. Now whether per capita GDP expands as I suspect it will over the next few years, the amount of disposable income that Indians have will grow. The amount of spending on roti, kapda, makaan is not going to change a lot and therefore you have a lot more money in your hand to do other things. What are you going to do with that? You probably going to upgrade your home. You are going to spend on education. You will probably spend on travel and leisure. You spend on healthcare. You will do more testing. You will try and make sure that you are healthy. You will spend on insurance. These are not expenditures, not all of them, some of them are saving as well but the rise in disposable income will give new options to a growing number of houses in India which today is available to a very small number of rich households. So, that will spread to a larger number of households in the next five, ten years. We are just at the beginning of this healthcare boom. There is going to be more lab testing in India. People are going to be a bit more careful. They are not going to take things for granted. Lifestyle disease will become more prevalent and so pharma companies will see greater demand for their lifestyle disease related drugs. This is just the beginning. It is not yet overshot. It is just coming back to averages. As limited as the space may be, does that also make insurance as an ancillary more attractive for the need to make our future more secure?Absolutely. When I see disposable income, it does not mean all of it is spent. Some of it will be saved and there is a growing reason for us to believe that it will be saved in financial products. So India’s financial markets have become more sophisticated. There is greater protection here for retail investors and there is a lot of work that the regulator has done over the last 15-20 years. It looks like our markets are safer and our financial products are a bit safer and therefore there will be greater interest in them. Whether it is insurance, whether it is equity mutual funds or in fact mutual funds, generally speaking not just equity mutual funds, a lot of these financial services which were non-bank financial services will do quite well over the next few years. You mentioned the privatisation plan and the first one that comes to mind is BPCL with road show on and expectations that the government will try and close that on priority. Are you looking at a basket of PSUs which may be up for grabs? There may be some trades around these privatisation activities because some of these companies will be sold at a premium to their growing share price because a strategic buyer will see things differently from the way the stock market sees it. A change in ownership could really trigger some re-rating. So, these stocks may be worth looking at. It is very important to get first privatisation out of the door because we have not done one in many, many years. A lot of people are waiting to see how smoothly this process goes and how well it is done. This one assumes big importance both from a macroeconomic as well as the stock market perspective. If it goes smoothly, then a lot of investors will start looking at India more enthusiastically. It could be one of those trigger points for India to start re-rating against EM. So yes we should watch it very carefully. On the monetary policy side, what are you factoring in there?There could be some more room. I do not think the government or the RBI both have done everything in terms of stimulus. The government has been very careful not to actually put everything out there. So it has left a little bit in its armoury just in case something goes wrong and then it has to do more stimulus. Likewise, RBI also will have some room for further stimulus. It looks like this is going to be a very strong agriculture year and so food inflation may continue to be a little bit depressed, which may take the headline inflation down. We may even have room on the rate side but at the moment, given what the world has done, India certainly has more room. I am not saying it will be used because we may not have that moment where we need more stimulus, but there is some more room. Do you have a bullish call on energy and would that be restricted to the divestment stories or are you looking at a larger basket of energy names?It includes the private sector and the public sector. We have been constructive on energy. Energy actually got derated a lot and this is a slightly longer term view. If you look at the last five, seven years, financials was the sector that led the market and it got rerated at the expense of energy, healthcare and discretionary consumption. Financials and consumer staples were the two sectors that gained share in the index or gained market cap share in the overall market and these were the three sectors that lost share. There is a reversal that is happening and I think financials will lose share. I suspect even to some extent, staples will lose share and energy, healthcare and consumer discretionary will gain share over the next three, four years. It is not a short term call, it is more what happens in the long term in market cycles. We get these sectoral shifts in the market all the time. Energy was a very strong performer between 2003 and 2007. Most people may not remember that it was the best performing sector in India and led the bull market before GFC came. This time around, it may shift to consumer discretionary and to some extent healthcare and energy. We are seeing dollar weakness that is aiding the bump up in gold to nine-year highs, silver catching up with a seven year high and equity markets across the globe doing well. What explains the dollar weakness and is this trend here to stay?It is largely explained by the relatively higher stimulus that the US has done compared to Europe and Japan. We do see the Euro beating dollar. That has been a call for a while and that has happened. What has not happened actually is that conventionally dollar weakness tends to lead to emerging market outperformance, but until recently, we did not see that. There are some signs that emerging markets are outperforming, but we will have to wait and see whether that happens. In the 2003 to 2007 period, the dollar was in a secular bear market. It went down for five years on the trot and emerging markets went up five years on the trot. So, they did extremely well versus the SPX. We have not seen that outperformance as yet. Of course it is early days and I do not know whether we are in a secular bear market to the dollar, but the US stock market continues to be the leader of the pack. What is happening in the currency markets is not currently being reflected in equities. The US is looking closely at the risk of a resurgence and then the elections are around the corner. How much trouble could that create for us? Also, do you have a year-end target or is it not the time because we are battling a difficult period?The US elections could produce some volatility. Frankly, I do not think it will directly affect us but there could be some volatility along the way. The US Covid situation is not as bad as it was and that is on the basis of where we are on the fatality rate. Those have been declining but there are some commentators who think that maybe it is going to come back in say four weeks from now. So keep an eye on that. It is obviously something we cannot predict with great certainty. Coming back to India, the spread in Covid-19 infections that we have seen since the country started lifting its lockdown, in fact since migrant labour started moving out in the first week of May, is that it actually creates herd immunity and these couple of sero surveys that have come out are pointing in that direction. This includes the one that BMC did in Mumbai indicating that maybe we are now acquiring herd immunity. I am not an expert on this but I am reading a lot of stuff, the ICMR thinks that maybe the herd immunity arises before the vaccine. These are not necessarily bad things that are happening so far as they do not get accompanied with high fatality rates. So yes, the US elections could be a moment of volatility but may not change the direction of markets unless the markets are already overshot by them.