Sound policy to drive cashflows not monsoon: Andrade

While the margin of safety is low in equities right now, cashflows for companies are expected to become more stable in the next couple of years, says Kenneth Andrade, Founder & CIO of Old Bridge Capital Management.

Cashflows will improve on back of policy changes and not monsoon. Spread of credit is also expected to improve as more money will be in hands of people, he says.

Banks, which have recognized stressed assets, have value, but pricing them is difficult. Not many structural changes are happening and thus banks cannot be priced high.

The consumption story is looking strong with wage hikes across segments. Near-term valuations in consumer durables are rich, he says.

Prashant: What are you doing, just tell a little bit about what you are doing right now. You are setting up a fund raising money and going out on your own?

A: I stepped out of the industry about a year back and currently just putting together a small team. We will get back to active money management, the course of the next couple of weeks, I hopefully raise a little bit of money.

Prashant: Raise money.

A: It is never a good time to raise money when markets are on the upswing, but I guess it always an opportunity in equities and as long as you in a pre-defined space and willing to stomach the volatility, in the longer term including the near term thing should be quite okay.

Prashant: Actually, paradoxically good time to raise money because people are willing to handover cheques right, but for you to actually put that money to work gets that much more difficult.

A: Yes, the margin of safety in equities in quite low right now. We have upfronted a lot of returns and we expect the execution has to kick in and earnings have to come back again. It is a pretty long cycle. The near term visibility is low and you got a lot of arguments around how liquidity is going to change the underlying characteristics of the price earnings multiple of the markets. So that’s not a very good argument to hold if you are a value investor.

Prashant: You said margin of safety generally in this market is low. What do you like right now?

A: We continue to build a very large picture of the Indian environment. All investors usually build a large environment in the Indian industry and break it down into verticals. So the opportunity as we seen it is the large demographic pattern that exist out here and the conversations currently are all around monsoon and good agriculture.

It pertinent because that 60 percent of your population or virtually 60 percent of your population, but if you just eliminate the monsoon spread and look at structural changes that are happened. First in the urban economy and now going back to the rural economy, I think cash flows will be lot more stable going into the next couple of years. That’s because of a policy change and it got little to do with the monsoon.

We should see start of the credit availability in the system expand quite rapidly and if that happens, you are transferring capital and money in the hands of the base of the Indian population, so that’s when I guess the demographic dividend will actually play out, but it is a very long cycle. You made a start this year, how it plays out like I said it is a lot of execution out there.

Ekta: We have seen the whole asset quality review (AQR) finished by banks last quarter, two quarters of it is completed. Do you think that this quarter might be better in terms of banks earnings or when do you think the cleanup will actually start showing, we in fact had the SBI management say that maybe, we have bottomed out in terms of non-performing asset (NPA), the NPA cycle right now would you concur?

A: Well, you haven’t had a bad assets that has come into play, that’s gotten funded after 2012, so what the banks are actually grappling with is something that is prior to year 2012 and you bought it forward to 2016.

So, you have been able to define the deterioration in your balance sheets, all management I guess have been able to identify the deterioration on their balance sheets and the good part of this entire system is, till last year they were refusing to acknowledge it.

The sooner you acknowledge the problem, you can actually see visibility that it will bottom out someday. Now whether it this quarter or next quarter, I think 2017 is the year that it will definitely bottom out.

Prashant: So any opportunities there? Sanjay Bhattacharya once told me that Kenneth is a true value investor, lot of claim the title, but you are one. Is there any value there?

A: There is lot of value in these businesses, but how do you price them in a cycle like this I am not too sure. I won’t pay top bucks for companies like this, because if you look at a 10 year return on equity (ROEs) in the banking business, very rarely have you come across a bank who has been 15 percent ROE plus right through the cycle.

So you average it out across some of the corporate lenders that exists, it is a pretty weak business. So you might be able to play a valuation bounce, but this is something structural happening in these companies, I don’t really think so, so it is a trade.

Prashant: I think Coromandel International is something that is top of your mind at this point. Just talk about that business.

A: As I look at it everything that’s got to do with monsoons and consumers is being a good run for all these companies. It is more to do with the segment that he operates or the sector that he operates in rather than the company itself and that essentially what is changing long term.

So, I am saying that if you are fortunate to have a good monsoon, but once you take cyclicality out of the system and that is coming from the way the crop insurance is actually priced on the ground, so that one large change availability of crop insurance and there is a pricing formula to it and what the farmers with the crop actually fail, the financial system now will have recourse to the general insurance companies and not really to marginal farmers, so you credit availability to the system now expands to AAA companies which take on the risk of a bad crop cycle which will happen.

To enable to price the product well and the government price the product obviously it has been subsidised to the hand of the end user, I think takes away the cyclicality of the cash flows from the system.

Ekta: Seventh CPC which is eventually suppose to flow down to state government employees, PSU employees. How much of a game changer do you think it is in the consumption story and if you had to play it, would it be via say the NBFC space, would it be via your consumer staples durables.

A: The entire space is extremely well priced. A lot of the businesses or lot of the returns have been upfronted already. We need to see how execution takes place, but when you talked about wage increases it is not just happening with the government employees. It is a stated objective of the government to double farm income by 2022 also.

So you seeing this time your GDP growth could be led by higher per capita income, now it can’t be as linear as that because you need a lot of asset creation at the side itself, but the asset utilisation of lot of corporate also necessarily needs to get used. So first you create the demand and one of the ways to create the demand is actually stimulate the consumption, per capita income and then bring industrial productivity into play before you grow into the next cycle of capacity creation and you get falls through.

I think yes you will get spikes in the consumer space which you already seen happening and you will have to look at that in that part of the market actually get fragmented itself, so you are asking me near term valuations are very rich and very priced in, so the argument is all about how much liquidity is going to chase that basket and that’s not an answer I have readily available

. Prashant: So you raise Rs 500 crore or more, what do you do at this point and what do you with that?

A: Let put it this way a lot of the markets already pricing in that consumption will happen and that is a small space before per capita income goes up there and companies that lead to the higher per capita income creation.

Prashant: Give me an example just to name them.

A: So step back into what’s really building per capita income on the grounds and farm don’t double because the government say they are going to double, you have got to work through the cycle and you got to bring your cost down and you got to take your incomes up, so lot of this is going to materialise on the ground and once that happens you create an entire ecosystem around it, so you get services that come in, you get large financial business that’s get created which is relatively small, so I am not talking about the banking system here.I am just talking about maybe the insurance companies that are there and that you create the entire logistics chain around the entire business out there.

So I think there a lot of multiple opportunities out there. It is not your consumer consumption led businesses you will have a lot of commodity businesses that will suddenly look like they are consumer companies over a period of time.

I think that’s the space you need to get into, so what happening with fertiliser at this point in time, I am little averse to stepping down into smaller companies in a market environment like this, but that a fairly large business and it remained within the government purview of how to price it on the ground for the last 20-25 years, that maybe changing, like I said it maybe changing.

So if the macros are supportive of some of these companies business models, I think dramatically you will see a lot more traction happening in the space.

Demand for houses is there, just not for expensive ones: HDFC

Speaking to CNBC-TV18 Keki Mistry, CEO of HDFC said that Seventh Pay Commission will put more money into people’s pockets. There will be a demand for white goods, cars, houses as consumption will increase.

Mistry believes that the urban economy is doing well. “Occupancy rates in hotes, car sales have all gone up,” he said.

He cautions that the rural economy is facing headwinds. But he is hopeful that a good monsoon this year coupled with the government’s focus on spending and the 7th Pay Commission hikes will result in an increase in demand and consumption.

Currently, capacity utilisation among companies is about 72 percent, he said, adding that it will go up to 80 percent on back of strong tailwinds.

The demand for housing is very much there in tier-II and tier-III towns, he said. The mortgage lender’s disbursements have gone up year on year, he said, without going into numbers. Only the big ticket housing projects are getting stalled, he said.

Repayment cycle for the retail segment hasn’t changed, he said. He also spoke about the stress on banks. There is currently more transparency and disclosure is better, he said.

“More than 60 percent of the non-performing loans (NPLs) will get resolved once economic acitivity picks up. The rest will be tackled on a case-to-case basis.”

On the fallout of the Brexit, he said India won’t have an direct impact. He sees dollar, yen and gold strengthening.

He is all praise for the Reserve Bank of India saying that it has built up enough foreign exchange reserves to counter any knocks to the currency.

Q: The cabinet has just approved the recommendations of the seventh pay commission. I wanted to understand from you what impact would this have on housing finance companies like yours? Will it result in higher transactions for companies like HDFC?

A: Forgetting into without getting into specifics for what it does for any one company per se the pay commission is obviously going to result in more money in the hands of people and we have seen historically that whenever people have more money consumption increases, whether it is consumption in the form of buying white goods, whether it is in the form of buying houses, consumption of buying cars, buying two wheelers, consumption always increases and as consumption increases demand increases. When demand increases you will typically see that there is a pick up in the investment cycle.

So, just to go back a little bit when we look today at the urban economy, the urban economy is doing very well. We see this on a day to day basis. If you go to a shopping mall, all shopping malls are running with reasonable capacity people are shopping, people are buying goods. You go see, you see hotels and the performance of hotels, occupancy rates in most hotels has gone up significantly. Car sales have gone up, restaurants are doing well. So, urban consumption is very strong. It is the rural economy which over the last two years has been relatively weak largely on the back of the poor monsoons we had. This year hopefully with good monsoons coupled with the fact that the government in the last budget had this huge focus on spending in the rural economy, infrastructure in the rural economy a combination of government spending and good monsoons will result in more money being spent or more money being available in the rural economy to spend.

So, a combination of increased demand in the urban and the rural economy topped up with this pay commission increase a combination of all of that will result in a significant increase in demand and as demand increases capacity utilisation will start going higher. Today capacity utilisation is about 72 percent and we start seeing industries making investments once you see capacity utilisation going to 80 percent. I have no doubt in my mind that all these factors taken together will result in a significant revival in the investment cycle with a lag. So, there will be a bit of lag, it is not going to happen tomorrow.

Q: But in your experience in the past years when pay hikes have happened what kind of proportionate increase in housing demand have you seen from your experience?

A: Forget the urban or the rural market but when we look at the tier-II towns, tier-III towns you look at the outskirts of big cities demand for housing has not come down at all, notwithstanding any data that you may have. We see this in a day to day basis. When we look at our disbursements our disbursements year-on-year (Y-o-Y) are going higher and higher compared to what they were in the previous year. You should never look at outstanding loan book because that gets influenced by selling of loans, it will get influenced by interest rates in the economy, you should look at disbursements. And we see rapid growth in disbursement every year.

So, what is not growing or what has slowed down is the big ticket, big housing projects, the large housing projects, expensive housing that has not grown but the outskirts of the big cities where we are typically catering to loans of say, Rs 25 lakh on pan-India basis that market continues to remain strong. Historically we have seen that whenever there is more money like you take in 2009-2010 as an example, not necessarily a pay commission but in 2009 companies cut down on bonuses, 2008-2010 post the Lehman crisis. And in 2009 things started getting much better in the second half of the year. And in January 2010 most companies paid huge bonuses to their employees because in the previous year they had not and therefore they sort of made up for it. And we saw record growth in that first quarter of 2010. So, if you see that January to March 2010 quarter we have never had that kind of growth ever, in percent terms. So, there is obviously an impact. More money means more consumption, more consumption will ultimately translate also into housing.

Q: Is it then safe to assume even the repayment cycle will improve from here on?

A: The repayment cycle for the retail segment has again not changed at all.

Q: But for the larger finances?

A: The larger market when you are talking of the corporate sector per se, corporate sector my personal view is that if you were to look at 2008-09 and you look at 2015-16 in my view 2008-09 things were a lot worse than they were in 2015-16 because that was the first time in India where we saw job losses and companies actually shutting down factories. 2015-16 we have actually not seen that. But the level of disclosure that we have in 2015-16 is a lot higher, lot better – there is much better transparency today than was the case in 2008-09.

So, if we had done a similar sort of review in 2008-09 we have probably seen non-performing assets (NPA) as bad as they are now or probably even higher than what they are now. So, and then in 2010 once the economic activity revived things started getting better a lot of these NPA problems got resolved on their own. And my personal view is that as the investment cycle picks up which it will with a bit of a lag a large part of the NPA problem will get solved by itself as the economy.

Q: So, now that we are talking about 7-8 percent growth levels over the next few years you think the NPA problem, is that sufficient to resolve the big bad loan problems that the banks are currently facing?

A: I can’t get into numbers because I don’t know all the numbers but if you take Rs 100 or X100 as the total level of non-performing loan (NPL) in the system I would say more than 50 percent, probably closer to 60 percent of that will get resolved once the economic activity really starts picking up, it won’t start immediately, it will happen with a lag. The remaining 30-40 percent of the NPA problem will have to be tackled on a case to case basis.

Q: But the other thing that also precedes growth as a credit growth in the economy which hasn’t happened. It has been in the single digits 8-8.5 percent for the last couple of years. Why has that happened and do you think this time it will follow after growth happens?

A: Credit growth is a function of two things. It is a function of the willingness of the banks to lend and it is a function of demand for money. The demand for money comes in from the corporate sector only when companies are building new plants. They are starting a new business and therefore they need to start a new plant and machinery, they need to start a new factory, a new office. That is when demand comes in. Demand for money comes in when people start investing when they see demand in the economy. So, as I was explaining to you earlier urban demand is there, rural demand has been weak.

A large part of India’s population stays in the rural areas and as the rural economy picks up that combines with the urban spending combined with the pay commission hikes will result in increased demand and therefore higher capacity utilisation and once capacity utilisation increases automatically you will start seeing people investing in new businesses. People starting a new power plant, a new factory for producing some product or the other and as that keeps happening demand for money will increase. If demand for money increases credit growth will improve.

Q: While we are talking about very high bad loans, on the other hand Reserve Bank of India (RBI) also released its financial stability report recently. It mentions that the corporate stress levels are coming down. That is a trend they have seen over the last couple of months. In fact this year that was a strong trend and the banks are increasingly lending less for very leveraged corporates. In your sense is that the experience you have had as well?

A: We don’t really lend to corporates in that sense but what I see in the market I can tell you. Yes, stress levels, I would say that the leveraging levels or the amount of borrowings that companies do that has come down but that has come down because people are not setting up new businesses. Once economic activity starts picking up and investments start happening in a bigger way you will see demand for money coming in. The demand for money whether it is from the same group or the same entrepreneur who is heavily overleveraged somebody else remains to be seen.

Q: We have seen a lot of financial market volatility in the last few days after the outcome of the UK voting opting out of the EU. Do you think the short term impacts will peter off in the coming few days. Given that we have sufficient Forex reserves etc do you think the impact of the Brexit India could weather and withstand?

A: I honestly believe so. The impact on India for Brexit does ultimately and Britain does really actually leave the European Union. There will be an indirect impact but there will not be a significant direct impact. The indirect impact could happen because whenever there is any risk averseness in the system you always find that there is flight to safety. So, money flows back into the US. Ironically when the US got downgraded one would have expected the US dollar to weaken and money to move out of the US on the contrary moving more money when back to the US. So, US is always considered a safe haven and whenever there is a risk off sort of attitude money goes back to US. So, you will see dollar strengthening which we have in recent times, you will see the Yen strengthening because of the way the system works and you will see goal strengthening. So, these are the three things which happened. Yen is more because of the carry trades. So, as dollar strengthens it will also strengthen against emerging markets and whenever dollar strengthens we see a weakening in stock markets in emerging markets because people start pushing money back into the US. So, we have seen a little bit of that in the last two or three days.

My sense is RBI has enough reserves. We have handled the currency situation extraordinarily well in the last two years. We have brought down the volatility dramatically. I remember 2013 and the difficult times everyone was going through mid 2013 post the Fed comment about rate hike and that has been managed very well. Also we have built up so much of reserves. There is enough reserves with RBI to manage the currency situation well. I would be less worried about Brexit today than what perhaps I would have worried had this happened three years earlier.

Q: We started the new financial year. In terms of the loan growth outlook which is somewhat slower last year, I know you have explained for various reasons like higher loan sold etc, what is your outlook, what is your sense on this year also?

A: We don’t make forward statements. So, I will avoid answering that question but I will come back in a moment to last year. What you need to understand is that you should not look at on balance sheet growth. On balance sheet growth is determined not just by the disbursements that take place. It is also influenced by interest rates. So, the loan that we give to a customer is repaid through an equated monthly instalment (EMI) and that instalment is fixed at the time the loan is taken. The instalment is not changed to reflect higher or lower interest rates. Now when interest rates come down in the economy and obviously we have also reduced our lending rates overtime the interest component of the EMI reduces because the lower percent is calculated on the loan outstanding at the beginning of the month. So, if the EMI remains the same and the interest component reduces then automatically the principle component increases which means the amortisation is faster. The first principle of banking that I learnt many years ago was that when you are in the business of lending the faster the money comes back the safer it is. So, we have not changed that principle, we have not told customers to go and pay lesser amount now because we don’t need so much amount, the money is coming back faster.

Q: I know you do not want to give out numbers but just a sense that you get as you start this financial year and will it be a better one?

A: We have not seen anything today which will make us believe that there is any slowdown in the retail individual housing loan business.

IL&FS sees Nifty ticking up to 9100 on solid earnings growth

Speaking to CNBC-TV18 Vibhav Kapoor of IL&FS said the Brexit was a vote against immigration. Next up, the US elections will be the key event to watch out for.

“If you have the Republican party winning the presidential elections this year, the impact can be severe,” he said.

He is upbeat on cyclical and consumption story. FMCG and all other sectors related to rural consumption will do well, he said.

The IT sector has been an underperformer as it has been impacted by the Brexit issue. “We have to see how severe that impact is,” he said, adding that a lot of these companies which have businesses coming form the UK and EU are likely to face a slowdown in that part of the business.

As regards currency, the depreciation of the pound and euro will cancel out the good impact of the dollar.

He is cautious on Tata Motors   and Maruti , which have have linkages to UK and the European Union.

He expects the Nifty to trend up by 100 basis points on the back of a good monsoon and the GST Bill getting passed. Otherwise, it will remain at 7700-8200 levels, it said.

For this fiscal year, he expects the earnings growth to improve by 14-15 percent and believes that going forward earnings could further be boosted.

Based on good earnings, the index could go up the 12-18 months,” he said, setting a target of 9100 levels for Nifty by March 2018.

Anuj: The market has been quite resilient to the Brexit issue, not just our market but globally. We had that big fall on Friday. But from that point most of the markets have recovered almost half of the losses. Do you think the market is complacent or do you think Brexit is not a big issue for the market and the market will move on?

A: Brexit is an issue definitely but it is not as big as the financial crisis of 2008 etc. Its impact will be limited. The second point is that I don’t think anybody really knows yet what the impact is going to be. It will only unfurl over a period of time. A lot of it is going to be related to what happens to the European Union (EU) what the actions happens there. How much of a slowdown does it cause, does it cause a recession in the EU, these things we will get to know only over the next few months. There is one other factor which is going to be very important. As I see this is a vote mainly against immigration and therefore it has some impact on globalisation going forward and therefore in this context the US presidential election is now going to become a very important event and if you have something happening there in terms of the republican party winning the election then the impact can be very severe going forward.

Sonia: The monsoons have been good so far. A lot of the consumption oriented themes are picking up. So, from this space what would you prefer the most because everything is rallying, whether it is cement, whether it is auto, whether it is real estate. What do you like the most?

A: We like the cyclical and the consumption story obviously. So, FMCG and all other sectors related to rural consumption. For example two wheelers, also cement to some extent. So, anything which is related to the consumption story and to an improvement in the cycle those sectors should do well.

Anuj: IT has underperformed. The clear near term headwind is the pound deprecation. But there is also this argument that dollar strength should be good for them as well. So, how do you play stocks like Infosys   and TCS   where we have seen 8-10 percent correction because of Brexit issue?

A: So, that is one sector which gets directly impacted by this Brexit issue. Again we will have to see how bad that or how severe that impact is as I said earlier depending on what happens to the EU whether that recession starts or a slowdown happens. But irrespective of that a lot of these companies have a fair amount of their business coming from the UK itself and from the EU. Therefore there is a good chance that this slowdown will happen in that part of the business for all these companies. As far as the currency is concerned the depreciation of the pound as well as the euro will probably cancel out the good impact of the dollar. So, that maybe neutral but going forward there could be an impact on some part of the business, a slowdown could happen and that is being reflected in the stock prices.

Sonia: If you had to sort of foresee what the next 3-6 months would look like for the real estate sector do you see any improvement in fundamentals at all and would you buy any stocks now?

A: Yes, some fundamental improvement is likely to start once the economy starts to pick up. Maybe it is not 3-6 months away, maybe it is a year away but the markets could start to factor that in earlier. Also this bill which was passed, the law which was passed some time ago regulating the real estate sector and making it much more transparent will probably attract more foreign investors and therefore is positive for this sector.

Anuj: How would you approach names like Tata Motors, Maruti Suzuki. Tata Motors of course was in a strong upsurge. And this Brexit issue has again dampened some spirits over there and Maruti Suzuki has had some headwinds in terms of the Japanese Yen?

A: While I wouldn’t like to comment specifically on any individual companies, I think companies which have direct sort of businesses in the UK and Europe are likely to get impacted and therefore the market is going to be cautious about them. And of course the strength of the yen is going to impact Maruti Suzuki or some of these companies adversely.

Sonia: What do you see as the range for the market now over the next 2-3 months. It started falling from that 8250-8270 level that we hit before the Brexit crisis. From here on what could the range look like?

A: We were looking at a consolidation of market in any case and that got triggered by the Brexit event. A lot of the good monsoon etc has been factored in and therefore the market will now wait for that actual event to happen. One thing which could push the market higher up of course would be the passing of the Goods and Services Tax (GST) bill in the forthcoming session of the parliament. If that were to happen then we could see another couple of 100 points of Nifty going up. So maybe to 8400-8500 levels. Otherwise the range is going to stay within the 7700 to 8300 levels.

Anuj: This market has been bottom up for more than two years. Index hasn’t really done too much. In fact as we speak it is a good 10 percent off the previous highs. Do you see any triggers in the medium term to have a big top down rally for our market and for the index to really move up, not just to 9100 but higher than that at some point?

A: That has to absolutely happen only when earnings improvement happen. We have seen almost three years of virtually no improvement in the earnings as far as the index is concerned. So, once the economy picks up and the consumption picks up and then the investment starts to happen we would definitely expect the growth cycle to resume. As it is we are expecting that in FY17 earnings will improve by about 14-15 percent and if particularly the monsoon is good and if going forward in FY18 if the momentum really starts to pick up in the economy you could have still better growth in earnings. So, if these start to happen and this starts to become visible then you will definitely see the index going up over the next 12-18 months not only to 9000 or 9100 which is our target for March 2017 but well beyond that during the course of FY18.

Sonia: You told me about how you like the two wheeler space but anything else from that sector that you like. Tractors are doing very well these days. Auto-ancillary names, some of these larger names like Bosch   are doing extremely well. Anything that you would pick there?

A: The auto-ancillaries are doing well but again that is one sector, particularly the companies which export, auto spare parts or auto parts which could get negatively impacted by the situation in Europe because Europe is their biggest market for these companies and if there is a slowdown in the EU or recession they could get impacted.

One other thing which I mentioned earlier as far as the index is concerned this target of 9100 as I said is subject to good monsoons etc passing of the GST bill but I will just like to reiterate that the US elections in my view is now becoming extremely important after the Brexit event and if there is a negative event happening there then things could be pretty difficult after November.

Anuj: One pocket which has done really well off late, of course one of the most heated spaces till about 6 months back, public sector undertaking (PSU) banks. Valuations still support these stocks but there is inherent problem which is still there. As a risk reward right now do you think there is decent risk rewards in names like State Bank of India   (SBI), Bank of Baroda   (BoB) and Punjab National Bank   (PNB)?

A: Actually it is rather difficult to say because I don’t think still the situation is very clear as far as obviously the asset quality is concerned. If you look at yesterday’s Reserve Bank of India (RBI) report they are still talking of another increase or more in gross non-performing asset (NPA) during the course of FY17. So, I would still like to be cautious there and actually in a lot of these stocks particularly the smaller PSU banks valuations are not that attractive. If you really discount them for all the NPA or the discount to book value for the NPAs some of them are trading at actually pretty high valuations. So, I would still be cautious, wait for another quarter or two and then take a view on it.

Model Shop & Establishment Act gets all-clear

The Cabinet on Wednesday approved the Model Shop & Establishment Act, which enables states to choose to keep shops and other such establishments open 24×7 all through the year.

The move, which is likely to prove highly beneficial for restaurants, malls, movie theatres and other entertainment entities, among others will also help bring incremental tax income into the goverment’s kitty and generate employment, says Kumar Rajagopalan of Retailer Association of India.

However, it now remains to be seen how states work around the hurdles that might arise in terms of maintaining law and order and such other issues, Rajagopalan says.

“Its a win-win situation for all the parties involved,” he says, referring to companies, government and consumers.  Lalit Agarwal, CMD of V-Mart and Rajesh Mohta, CFO of Speciality Restaurants    welcomed the move and expect it to provide fillip to revenues.

“We do operate for all seven days but only for 12 hours so far. We now have scope to double the number of work hours to 24,” Agarwal says.

Nigel: We are finally getting in the news that the cabinet has approved the model shop and establishment act, what is your first take on that?

Rajagopalan: It is a very good move from the government. It is definitely going to help consumers because it is going to enable consumers to come in and shop at the time that they want to shop.

It will definitely help the retailers and improve the employment in the country. It should also help the government because if there is enough business happening in this country, it should help them getting more taxes. So I think it is a win-win-win move and this has been something that has been due for recognition for a long enough time and this will help the states in enacting the right kind of laws because ultimately shop and establishment act is a state law and the states will have to adopt it.

Three of the states in the country have already done quite a bit in this, Karnataka has passed its retail policy, Maharashtra and Andhra Pradesh were the two states that have already created a retail policy. But this move from the central government is a very great move to get the state government to start thinking retail, start thinking employment and start thinking customer efficiencies.

Reema: This will act as a model policy and then it is left to the jurisdiction at the states whether they want to implement it or not?

Rajagopalan: Correct. But I think most of the states should be able to implement this.

Reema: Any potential reservations which we see on the part of states which could prevent this from being implemented?

Rajagopalan: I think some of the states may go back to the thought of what happens to law and order, how do they manage if the stores are open 24/7. However, those are details that needs to be worked upon. It is not something that is going to be big and worrisome.

More importantly, this is an enabling act which if the state says that the store can remain open 24/7, it doesn’t mean that everybody is going to keep it open 24/7. All those stores and all those malls which are going to be able to get the best from the consumers at that time and that consumers are going to come in are going to keep the stores open and it is going to reduce the amount of red-tapism and the amount of inspector raj.

The other big thing about the shop and establishment act is about creating that equality for women in retail workplace. That has been pending for the longest ever time. We know that women cannot work beyond 8pm in most of the states, whereas in the IT — if you look at parallel as other services industry if we had not opened up for women to work along with men, we would have never been where we are as far as IT is concerned in this country. So, I think this is the other very big move from this and hopefully all the states would adopt it.

Nigel: You are talking about additional revenues from the government, how do you think it will be split up between the state as well as the central government?

Rajagopalan: That is a very different topic because there is quite a lot that is being discussed currently about the goods and services tax (GST) and they are saying that at the topline — if revenues of retailers increase and automatically it increases taxes, that is what it does to the various states. So for state, if it is increasing taxes, it is increasing employment because people have kept their shops open for all seven days automatically and for longer hours, it means they will have multiple shifts and this means more employment, so it increases employment, it increases revenue.

Reema: Is this good news for companies like V-Mart and also would you choose to be open seven days of the week, 24 hours or do you think the cost will outweigh the benefits or the incremental sales that you see?

Agarwal: It is a good news for the whole industry and it is a welcome move by the Prime Minister of India and it is something which we are excited about because we operate in smaller town and we have been listening that malls have been operational for all the 365 days. The small shops in those bajaar areas in high street are not been allowed by certain commissioners and certain district magistrates to operate throughout 365 days so everyone is going to have the similar policies and everyone can enjoy.

It is a best thing because nowadays every individual is busy so either on Sunday or a particular week days they prefer to be off, it is very difficult for us to maintain for the customers to come and shop. So it will be good news for the customers as well as the employees and for the entrepreneurs and the retailers like us because I think obviously stores in fashion areas may not operate 24/7 but yes, we will operate seven days but not 24 hours.


India disappoints both optimists & pessimists: Ruchir Sharma

Speaking to CNBC-TV18 Morgan Stanley’s Ruchir Sharma said we live in a world that is madly disrupted by the crisis of 2008. A few trends have been playing out since then. Brexit has been a big manifestation of that trend, said Sharma.

“There has been a revolt that has been taking place against the establishment everywhere,” he said.

Earlier 2 out of 3 incumbents were getting re-elected, but now only 1 out of 3 are getting re-elected.

It was a big miscalculation on the part of the British Prime Minister to call for a vote on the EU membership, he said.

On the possible Brexit impact on countries like Netherlands, France and Germany, he said incumbents rae likely to keep losing rounds. But it is not always for the worse. As in Latin America, a regime change has resulted in business-friendly people coming in place of leftwing politicians, he said.

Another trend that Sharma identifies is deglobalisation. Today, countries are turning inwards, he said.

The third big trend is income inequality, he said.

There could be a recession, he cautions, but that is like night following day. Every eight years, there could be a recession, he said.

Valuations aren’t a bad judge of how a country performs, he said. But what is important is which country surprises on the upside in terms of the economy growth. “That is a predictor of returns,” he said.

India is a country which disappoints the optimists and the pessimists, he said. The weight of expectations are weighing on the country, which was not the case for Russia and Brazil which have grown well.

He doesn’t think there will be capital inflows into the country or into EMs. And the biggest contributor to low inflows is slower crossborder bank flows, he said. “European banks don’t want to to raise their EM exposure,” he said.

the markets have been a step ahead of the US Fed, second-guessing its moves. “There is no surprise elemen left here,” he said.

Central banks are beginning to see that there are limits to monetary policy actions. “Asset prices have gone up more than economic activity and it leads to resentment among middle income groups.”

On RBI governor Raghuram Rajan opting out of a second term, he said it has rankled a few people, but the Indian economy is looking a lot calmer now.

He said the government hasn’t done enough to withdraw from public sector, adding that what is happening with the restructure of bank loans isn’t enough.

Q: I will talk to you about the book in just a second but let me ask you what everybody is talking about and that is Brexit and what it now means as far as the global economy is concerned, what it means for global equities. How concerned are you about the implications of the Brexit. People are still trying to grapple and fully come to terms with it?

A: What is really going on here is that this is a world badly disrupted by what happened in the 2008-2009 financial crisis and there are few trends which have been playing out since then and Brexit is really the manifestation of those trends. What are these trends? One, that we are seeing global revolt against leaders everywhere in the world and so, it is very popular to talk about the fact that Brexit is just about leave or remain in United Kingdom but there is a bigger political picture here which is the fact that there is a revolt against the establishment to be taking place across the world in many countries. So, we track the popularity ratings of the 20 largest countries in the world and the popularity of the leaders there and that is currently at an all time low.

Q: Across the board?

A: Across the board, I mean the average. And what that is really telling you is if you really come in the way of the voters by being in power you are likely to be thrown out. And that is the big turnout from last decade. Last decade our work was showing that two out of three incumbents were getting re-elected. Now what we are seeing is that just one out of three incumbents are getting re-elected. So, the trend is accelerating.

So, there is a big global revolt taking place and that is a big miscalculation that the British Prime Minister did which is that he mixed up domestic politics with this vote and this vote is as much rejection of him and the anger that the popular support against him as it is about the core issue of Brexit, this is one thing which has been under appreciated.

Q: But what does this then mean as far as the EU and the future of the EU itself is concerned. You were talking about incumbents not being voted back to power. Netherlands, Germany, France these are big elections that we are going to be faced with a couple of months down the road. What is the future then as far as the EU is concerned?

A: The same pattern which is the fact that the incumbents is likely to keep losing ground everywhere but it is not always for the worse. This is an important point, because if you look at what is happening in Latin America. In Latin America what we are seeing is that the incumbents there are all getting voted out but the incumbents happen to be left wing leaders there. Instead who is coming to power in Latin America now are more business friendly market oriented people are coming to power in Latin America. So, this is a very differentiated picture, it is not the same picture everywhere.

In Europe yes, this is happening but the main story is that the incumbents are getting voted out and it is not always the populists that are coming to power. This is one big trend. The other big trend which we are seeing across the world is deglobalisation. So, we all grew up in the 1980s, 1990s believing that this is a world which is going to get much more integrated, that people are going to trade much more, borders are going to open.

Q: And it is at an all time low cross border throes at this point of time?

A: Yes, that is right. In terms of both cross border capital flows have shrunk quite a bit compared to at least where they were last decade and even trade has begun to collapse. So, trade growth     today is basically stagnant and that is the first time outside a recession that we are seeing such low trade volumes in the world. So, this is deglobalisation which is that countries are turning more inwards, protectionist barriers are going up everywhere across the world and this is something that we are seeing even in Britain. That is the resentment against it.

The third big trend is income inequality. This is a very big deal because if you look at the voting patterns even in UK you will see that the places which voted to remain within the European Union were really the rich areas. They are relatively rich areas like London. But London has benefitted so much from globalisation and from the fact that you had such good flow of capital running through London.

One important statistic that before the global financial crisis London’s per capita income relative to the rest of UK was about 60 percent higher. Now it is more than 70 percent higher and similarly like London now is the home to one of the largest concentration of billionaires in the world. So, explosion in wealth which has taken place and that leads to resentment amongst the people outside about what is going on.

Q: You used the word recession. Let me ask you this in the context of the recent developments now. Do you believe that the possibility of a global recession is higher today on the back of the Brexit?

A: I would say marginally yes, because my own sort of thing has been that recessions follow expansion just like nights follow day. So, once every eight years or so we tend to have a recession. So, we should not be that surprised to get a recession. But I am not that convinced that what has happened in UK and the contagion of that for the rest of European Union may cause a recession partly because these economies haven’t come to matter that much for global growth. Because they have been growing so slowly they haven’t contributed that much to global growth. So, any changes in their economic growth rates do not have such a large impact.

As my bigger concern over the last 12 months has been China and this is very important because even if you look at the Indian market the sensitivity to what happens in China today is much greater than let us say the sensitivity to what happens let us say with Brexit. Like when China was in a freefall in the late summer last year or then again earlier this year the Indian market had a much stronger negative reaction compared to what has taken place in the first few days after Brexit.

Q: Since we are talking about markets let me ask you about what the outlook is in the context of the recent developments specifically as far as India because there is one camp that believe that we are largely insulated, that the story for India is looking good, we are an island of prosperity if I could call it that or an oasis in the desert as somebody else on the channel pointed out. But how would you look at India in terms of valuations, in terms of macro stability and what that then bodes as far as the markets are concerned?

A: Yes, this is favourite sort of sell side trope of looking at valuations and one thing which I am convinced about is that valuations just done tell you anything about how a market is going to do. We have looked at it across the emerging markets universe and the valuation of one country versus the valuation of another tells you absolutely nothing about what is going to happen in the future. So, that is a very poor guy. What it does tell you about what is going to happen in the future is which countries surprise on the upside in terms of economic growth and which countries disappoint on the upside in terms of economic growth. That is the single most powerful predictor of returns over the next three to five years. And in that regards as far as India is concerned I agree with the general view that India looks relatively better compared to everybody else. But as you know my favourite line even from the book which we will speak about in a bit is the fact this is a country that has consistently disappointed the optimist and the pessimist. And that is something which I would keep in perspective as far as India is concerned that we all tend to get very carried away by our own talk here. There is an echo chamber where everyone comes here and says the same thing, our fundamentals     are fine and stuff.

Q: Is it overhyped today?

A: I would say expectations are very high out of India. So, for example if you look at the best performing markets in the world this year they are Russia and Brazil because expectations were so low they were beaten down and they have risen. On India it is the weight of expectations which is something which is sitting on this market a bit heavily.

Q: Who are we likely to disappoint today, the optimist or the pessimist?

A: If anything at this stage it has got to be the optimist, just given how optimist people are about this country. But I still feel that on a relative basis from a fundamental basis from 3-5 year India does look relatively better. But for now I would say that we should be a bit careful about the fact that expectations are very high.

Q: Let me also ask you very quickly about what you foresee now as far as capital flows into emerging markets in the context of the Brexit. Do you see it impacting significantly capital flows specially into countries like India?

A: I think we should just in general expect lower capital flow. That is a fall out of the deglobalisation and the biggest contributor to lower capital flows today is that cross border bank flows have reduced significantly. So, you have much less bank lending going on between borders. European banks do not want to raise emerging market (EM) exposure or India exposure not because they have any view on that, just because they have turned much more inwards because they have problems at home. Same things with even American banks. So, these banks which lend so profusely to EM are not keep to that is just a reality.

Having said that one place where we have seen a pickup in flows in India is foreign direct investment (FDI) flows. The FDI flows in India have picked up. In fact as a the share of gross domestic product (GDP) India is among the highest recipients of FDI flows in the world. So, flows are changing. The nature of flows is changing but in general India is likely to receive less capital flows in total because cross-border bank lending has collapsed across the world and that was the largest share of cross border capital flows last decade.

Q: Before I come back and talk to you about India let me also ask you about US and how you see the US and specifically given what has happened do you believe that the possibility now of the Fed moving on hiking rates is not perhaps not something that we need to be concerned about. Is that over and done with?

A: Nothing is over and done with but the markets are way ahead of the Fed, which is the markets never believe that the Fed was going to hike interest rates this year. They briefly priced in one or two rate hikes when the Fed seemed extremely determined to go down that path. Those expectations have now been stuffed out. So, I don’t think there is any surprise element left here, I don’t think the market expects the Fed to do anything for the next year or so and given how weak the global economy is I am not surprised at that conclusion.

Q: Given the fragile stage of the global economy do you believe that central bankers around the world will continue to be even more accommodative?

A: There is a limit to that because one thing that central banks across the world are beginning to realise is that there are limits to their monetary policy actions. One thing that we have seen and this is something which has been even true in UK that asset prices have gone up lot more than economic activity. And when asset prices go up a lot that does lead to a lot of resentment among the middle income and the poor people because they don’t own these assets like stocks or bonds and those prices have gone up. Even high end property across the world has gone up. So, central bankers have to be a bit wary of the fact that they can keep pumping all those liquidity out there but where is it finding its way and if it keeps finding its way into asset prices that is a definite negative.

More referendums likely to dismantle EU: Ambit

In the past 10 days, two major events — Brexit and Rexit — have created panic in the global and Indian markets. Ashok Wadhwa, Group Chief Executive of Ambit Holdings shares his views with CNBC-TV18 on these events that may have negative global and domestic implications.


Five days after the United Kingdom voted to leave the European Union, there is a clear pessimism with respect to global financial situation, Wadhwa said, adding that Brexit will have a negative impact on short and medium-term impact on the UK’s growth rate. There are also fears that some European countries like Scotland may call for a similar referendum and thus the EU stands to get dismantled if countries call for such referendum, he said.

Wadhwa said that the Lehmann crisis and Brexit are two very different situations. Brexit has political, financial and economic implications and the long-term impacts of which most economists are not willing to hazard a guess right now, he said.

India impact

Economists say that emerging markets present a buying opportunity due to Brexit. Wadhwa said India stands out in emerging markets and if Indian markets were to fall to a certain level, it presents a buying opportunity in some specific stocks.


Reserve Bank Governor Raghuram Rajan’s resignation is a smaller event compared to Brexit, said Wadhwa. Historically, India has been able to find a talent of high calibre to replace chiefs of top institutions, he said, adding that the general market participants believe Rajan’s move wouldn’t impact India’s markets.

Anuj: What has been the first reaction or the ground reality that you have gathered as far as Brexit is concerned and the possible impact on global equity markets?

A: Almost everything over here in London has been overshadowed by the Brexit outcome. I have to say that as I heard some of the more prominent speakers over here there is a clear pessimism both vis-à-vis UK economic and financial market situation and then moving on to both the global economic and financial situation. The general mood is very clear that what has happened is not good for UK. Clearly it will have both short to medium term impact on growth prospects in the UK and certainly detrimental for the financial markets, some of the larger banks like Morgan Stanley and Goldman Sachs are already talking about shifting huge number of jobs out. And then there is a belief that if UK has done this will Scotland now call for a referendum, something else is coming up in Italy very soon. Something else will come up in another parts of Europe. Therefore the European Union (EU) will again be dismantled and if that matters clearly for some of the smaller and medium economies in the European zone it is extremely bad and detrimental.

Sonia: Can we compare this current crisis to the Lehman crisis. I know a lot of people are saying you can’t compare it, but what is your own view?

A: The Lehman crisis and the Brexit situation are two very different situation. Lehman was caused by significant overleverage in global economy and that along with the burst in the housing bubble effectively lead to re-pricing a serious discount on several financial assets and that caused severe stress on the banking system. Brexit is very different. Brexit has political implications, Brexit has economic implications, Brexit has implications on the financial markets and I dare say it has a much longer term impact because Europe as a zone is getting dismantled. It may just be the beginning of that process. Clearly as I said earlier in the short to medium term both the economic the financial markets impact are negative. What will the long term impact be, most economists over here are not willing to hazard a guess, saying it is relatively pre-mature at this stage.

Anuj: A lot of global experts have been saying that if because of Brexit crisis emerging markets (EM) correct specially India, it will be a big buying opportunity. Is that the sense that you are picking up as well talking to investors, they are willing to buy EM if they fall sharply because of Brexit?

A: As I have repeatedly said on your channel before India clearly stands out within the EM. I cannot say whether a drop in prices across EM leads to an opportunity to buy other EM. But I would dare say after having studied clearly Brexit is a very new phenomena. We are all trying to understand and learn the implications of Brexit on our respective countries. But I dare to say that if the Indian markets were to fall below a certain level I would think clearly India offers a buying opportunity at least on a select stock basis.

Sonia: I am sure while Brexit was the talking point a lot of the investors who came to the conference would have also been disappointed with Raghuram Rajan’s exit. How big a risk is that going to be for the Indian markets you think?

A: I have to confess and say that Brexit has significantly overshadowed any impact or discussion on Rexit. In hindsight Rexit looks like a very small, less relevant event, of course relevant to India but less relevant in the global context clearly. Having said that there were a few investors who shared their disappointment but also were cognisant of the fact that historically India has been able to find very high quality talent to effectively replace any important individual that we lose. So, whereas there is clearly a short term disappointment particularly amongst the economist community here among the kingdom, the general market participants believe that it is not significant enough to effect India’s current market scenario. They are really more concerned about Brexit and what Brexit could impact other Asian economies.

Anuj: Coming to your conference now I believe that your are showcasing a lot of domestic lead companies and that has been the theme as well, we have seen so many domestic companies do well. There is so much global correction going on. Do you think that theme is going to stand out in terms of strong domestic companies, strong balance sheet companies doing well?

A: As always our list of participating companies are what we term as good and clean corporates. Mid to large corporates, companies that have historically shown that they are not opportunistic but they are very strategic in their approach. Thermax being a good example, TVS Motors being a good example. These are companies that have always focussed on core capability and leveraging their core capability have built significant business. Clearly there is an overweight on companies that are dependent on domestic consumption given how the world is shaping up at this point of time one sees a very serious challenge in demand and one looks at the very likely demand contraction around many economies. Therefore I would think we are better positioned to kind of emphasise on companies that look at Indian demand     as the core of their growth story and that has really been the list over here for us.

Sonia: The interesting list of companies within those domestic plays which you are showcasing are some of the private banks and small banks. You have been in the financial markets for too many years and have seen the ups and downs, from hereon what is your broad view on the financial sector?

A: Clearly well run private sector banks are seeing a significant surge in demand for their stock. So, our focus again is DCB and City Union Bank. Over here they are participating in our conference. These are banks that we believe have relatively smaller balance sheet but they are focussed very hard on ensuring that they grow commensurate to their capability. They are not overly ambitious. They have not over grown or laid too much emphasis on building retail book or the size of their balance sheets. And we think these banks are very good candidates for substituting some of the demand that will move or is moving from the public sector banks to the private sector banks.

We of course also have Bank of Baroda (BoB) which we think is an outstanding story of how a new management from the private sector is working hard to manage this large very successful bank historically and bring back past glory. So, it is a combination of public sector bank into private sector banks. I continue to believe that the Indian story is incomplete. If you believe that India is a good prospect which I believe it is then the private sector banks in India cannot be ignored. They are a proxy to the Indian gross domestic product (GDP) growth story and to the Indian consumption story and I would like to believe that these are wonderful opportunities for all the investors.

Anuj: The other big event or big macro opportunity will be the passage of Goods and Services Tax (GST) in the monsoon session. How critical is that going to be for India’s image and do you think that is going to be a big trigger for corporate India and for global investors to take note and put more money into India?

A: Unfortunately again Brexit has made all these events completely irrelevant. Having said that a group of investors today did tell us that they see the passing of GST as a very important milestone in how this government is able to frame and be able to defend policy making in the parliament. So, from a directional perspective, from a messaging perspective passage of GST will be seen as very positive. Corporates who are present here and who are largely dependent on domestic consumption as I said are very positive, are enthused by the fact that GST could become a reality by April 1, 2017. They continue to emphasise that GST will significantly reduce downtime from their business perspective that a lot of costs will be removed and a whole supply chain will be significantly simplified leading to both improved margins as well as quicker deliveries to the customers. So, that is positive for sure.

Gold ETFs lose shine for investors who eye secure bets:Kotak AMC

Gold is seeing demand both from the consumption side (jewelers) and from black money-holders side. Gold exchange traded funds (ETFs) have given fantastic returns despite which the flows have not been significant, says Nilesh Shah, MD of Kotak Mahindra Asset Management.

Investors are not looking at the past performance, but considering safer options like equity and fixed income. “More flows will come into fixed income, equities and not gold ETFs,” he says.

Certain shifts are happening within equity flows. This year has seen 35-40 percent flows into balanced options than pure equity funds on back of global volatility.

Quality of flows is improving in systematic investment plans (SIPs) and existing funds with good returns, Shah says.

Abhay: What is your sense at this point in time on what is happening to gold prices and more importantly the interplay between the domestic price of gold and of course the real interest rates? So do you believe that if gold prices stay elevated in the uncertain global environment, we could probably see some impact on the demand for financial savings in the country like over the last two years we have seen a very significant transition from physical savings to financial savings?

A: Gold has lot of interplays — one is that it is a good parking slot for putting your black money and a substantial portion of gold demand is coming from that side. On the other hand, there is a jewellery consumption as well. So there is a consumption demand also to it.

The gold bond scheme and gold monetisation scheme is also supporting at least that legitimate portion of investments to move into gold without resulting into import of gold. Purely from a mutual fund point of view, gold ETFs have delivered fantastic return year-to-date (YTD) as gold prices have bounced and rupee has depreciated and despite that spectacular return, we haven’t yet seen significant flows coming into gold ETF.

This is quite extraordinary where investors are not looking at the past performance, last six months performance to invest but they are probably taking a longer-term call and they are finding that maybe equities and fixed income are better investment opportunities compared to gold at today\\’s level.

So my guess is that purely from a domestic mutual fund point of view, I think there will be more flows into the equities and fixed income category than into gold ETF category.

Indian equities at risk from global market connect: Jefferies

The biggest risk for Indian equities is its high correlation with global markets and Nilesh Jasani Head of Research (Asia Pacific) at Jefferies feels in case of a global risk-off situation likely due to events following Brexit, India could be under pressure.

In an interview to CNBC-TV18, Jasani says, it is unclear how post-Brexit economic and financial markets dominos will fall globally, but market risks have certainly climbed.  “Valuations in India are a concern,” he says.

However, he also believes India’s economic connect with global economies in 2016 is materially different from 2008 and this time there is a higher chance of India being insulated.

Mangalam: What have you made of the Brexit so far and what are the kinds of implications it can have in the markets across the world and at the same time when can we expect the implications to come by. Is it going to be something like Lehman or is it going to take longer period of time?

A: The way I see Brexit is that it opens up a completely new event frontier. In my experience over the last 20-25 years there are very few time when you go through a sudden new event, a bit like Thai baht collapse of July 1997, UK\\’s Exchange Rate Mechanism (ERM) collapse and there are two or three other events that you can talk about who start their own chain of events.

The reality is that as of now one can only hypothesize and talk about whether this may happen or that may happen. The only guarantee out here is that it is unlikely to not result in almost anything. There are a lot of people out there and there is a tendency that most of us have that somehow this won\\’t matter, somehow it won\\’t result in much, and somehow everyone is overreacting, while that is true of most of the things that we react to. I do not think that is true about Brexit; whether it leads to some sort of event in UK, more referendums, more votes, whether it leads to intense negotiations between UK and Europe, whether it leads to pressure on yen crossing 100 and policy reaction of various kinds in Japan or something in China. There are so many different scenarios one can paint and nobody is going to get them right. As I said the only thing guaranteed out here is that lot many more events are going to happen because of that vote.

Sonia: What is the mood like amongst the investor community in Singapore currently? Do they believe that a large part of the Brexit correction has already happened on Friday or is it very naive to believe that it has been largely discounted?

A: It roughly depends on the people you talk to. There are investors at various local markets whether they look at only Indian market or a handful of Asian markets. In our part of the world there are definitely large numbers of people who feel that maybe the biggest Brexit shock is over in financial market and the rest is going to b simple from here on while if you give a call to someone in Europe today, you will get a totally different impression. However, you get very different kind of reactions in the entire range.

Sonia: What is your view? Is there s a chance of India or the Indian market decoupling from global markets over the next 6-12 months because of domestic issues improving whether it is monsoons or whether it is the earnings pick up?

A: It is market versus the economy. I think decoupling is a word which I mocked at back in 2008 when I talked about how our economy was also massively linked to global economy rather than not just our market. I think this time around our economy has higher chance of being insulated. One of the things that I have looked at is capital flows as a percentage of gross domestic product (GDP) which was extremely high in 2006-2007, just as we were entering in 2008, one of the things the market hadn\\’t recognised back then was how much dependent our economy was on capital flows. However, that is definitely not the case now and that is a great positive that the economy is far more independent compared to where it was in 2012 or in 2008 – that was positive. I won\\’t say the same thing about the market. I think our market is extremely correlated with the world markets at least for a while in 2014-2015 when we had the wave on the back of the election, Dr. Rajan\\’s early years, that was the time when India was charting its own different path but if you look at the correlation over the last one year with global markets, Morgan Stanley Capital International (MSCI) world, MSCI emerging market indices, they are back to the very high levels that we witnessed some of the times in the last 15 years. So we are much correlated, we are in over weighted market, we are in over owned market, our valuations are a bit of a concern. If there is a global risk off and people have to sell because of redemption pressure. I think we will come under pressure.

Reema: Do you see a global risk off which could result in the Indian markets under pressure because we are in unchartered territory and let me follow that by asking you, do you see the upside cap for the Indian market on account of global uncertainty and your take on the outflows or inflows from the investors?

A: Let me try and answer these questions fairly quickly. On first question, whether we see the risk off or not. It\\’s anybody\\’s guess. As I said it totally depends on how events unfold. The chances of an event are high. I think in the nearest term our biggest risk is going to be the market itself. We had such a huge volatility on Friday. There are a lot of people who have come out and talked about their gains. And that always happens that those who make money are the first ones to come out and advertise their victories but logically there should be people who possibly have lost huge amount of money on Friday. Hopefully none of them in the kind of way that cost a major hedge fund burst at various time till last 15 years, but that is one near term risk. If we go pass that then I think volatility will depend on various developments in UK and Europe.

In terms of my expectations on India, what I have been saying and that is a long topic, so possibly not for today, that India over the last two years, it was India\\’s tremendous top down, which was helping the market while a pretty weak bottom up was depressing the market and that is the reason why we have been in this narrow Nifty channel for about 18 months. We had last year, for example, one of the best interest rate cut cycle that we had seen in years. We had fall in inflation, fall in current account, fall in fiscal deficit, good GDP growth. It was the kind of top down combination, which according to my charts, we had never seen before in India. On top of that we had a government that everyone liked in the investment community and we had a central bank on which everyone had faith in the investment community.

Our bottom up is the fact that we do not have any earnings growths for three years; three years earnings growth is zero, five years earnings growth is 2-2.5 percent. So we have publicly listed companies which are competing with agriculture in terms of the growth they are providing for five years now, not one or two but five years and those are the kind of divergent forces we are dealing with and with Brexit and with global environment, I do not think that it is much that changes on bottom up that our bottom up remains a bit of a negative factor on the market. So overall my view is that we remain in this channel and valuations will remain a concern at some time but equally if the market falls then people will like the way the economy is behaving, the economic resiliency as well as the governance will remain in the channel.

Sonia: How high is the possibility of the market perhaps resuming its uptrend with some amount of ferocity? Only because liquidity could perhaps be in abundance now because there are some talks that the Fed rate hike could be postponed from September to December purely because of global volatility and now since Governor Rajan will not be extending his second term, there is a possibility of an easier monetary policy stance by the new Governor who comes through. Of course this is all in the realm of speculation but in your assessment how high is the possibility of the market hitting a new high sometime this year?

A: I would say pretty low. One of the biggest themes that I am running with for quite a while was the risk of Dr. Rajan not continuing and one of the things that I have written since Dr. Rajan\\’s decision as not to go for the second terms, is that perversely the chances of any new Governor coming in and raising interest rates and not cutting, have gone up little bit compared to Dr. Rajan doing the same. I think what people often forget in trying to ascribe blames on the government on Dr. Rajan\\’s entire episode is that Dr. Rajan and Mr. Modi\\’s administration were roughly on the same page when it came to inflation. Yes, there was a minor disagreement on the pace of the cut but both the parties were roughly on the same page when it came to inflation even when it came to non-performing loans (NPLs). Their biggest difference was on fiscal policy. And that is where Delhi had a lot of issues with the Reserve Bank of India (RBI) having its own say on where the fiscal had to a headed and there are lot of angle over there including Fiscal Responsibility and Budget Management Act (FRBM), including what kind of things could happen but with inflation on the rise, with consumer price index (CPI) at 12 or 15 or 18 month highest level, with Uttar Pradesh (UP) election in May, with the base effect completely turning against the CPI from October-November onwards until March next year – my own calculation suggests that CPI could even cross 6.5 percent between December this year and March next year. In that kind of an environment, chances of interest rate cuts near zero.

Sonia: In this kind of an environment since you are saying that there is a low possibility of the market hitting a new high. As an investor who has perhaps more than a year’s time horizon, how do you approach the Indian markets now?

A: It is roughly the return of what we had over the last 12 months which is – play the channel. There are times when the market gets very depressed, a bit like January and there are times when we are ignoring lot of risks like the time now when there are revisionist views on a lot of things including liquidity, including monetary policy and monsoon. If you play in this wide channel with some fundamental investments, there are great midcap stories out there, there are great secular stories out there, there is a lot in the market but expecting the market to go up is possibly a bit too much to ask.

RBI always ready to act when markets misbehave, says Rajan

Speaking exclusively to CNBC-TV18 Raghuram Rajan took questions from Latha Venkatesh and Udayan Mukherjee on a wide variety of topics — the most on Brexit and its ramifications.

The RBI governor said that all of us had sneakily suspected that the UK opinion polls didn’t reflect the true intent. “Hopefully, saner minds will prevail as we look back on this episode and people see the costs of leaving,” he said.

Brexit reflects the mood of a people who are tired of engaging with the world and with immigrants, Rajan said. UK does face an uphill task in managing its current account deficit, he added.

“If the UK doesn’t want inflation perking up, the Bank of England will have to tighten its monetary policy.”

Rajan doesn’t see more breakaways from the EU happening.

“The euro has been depreciating and dollar strengthening. In general, this is not good news for economic growth,” he said.

The European Union will figure out ways to get over the Brexit, he said. Central banks the world over have played a role in calming markets.

Rajan is sure that Britain didn’t engineer the Brexit in order to have the pound sterling depreciated. “It is a consequence of this mass movement,” he said.

Let me reiterate that the Reserve Bank is watching all the markets; it is ready to act when there is disorderly conduct/behaviour of the market,” he said, adding that bond markets, currency and money markets are the most important markets for India that are under watch.

Rajan dismisses fears of a global recession as a result of Brexit. There will be no dominoes effect, he added. ”

The general sense is that we will reflect on this dramatic event and you will see reactions from across the world. It is important that no one panics.”

Regarding repercussions in the US, Rajan believes there is no one-to-one correspondence to what happened in the UK. “Brexit does sound a warning bell about the kind of anger that people have against the system.”

He believes that there is bound to be outflows from India as money has to go somewhere. But as long as India maintains its reputation as a country with macro stability, one shouldn’t worry, he said.

His message to financial markets was the adjustment will take place and there will be a reassessment of prospects for certain asset classes.

Latha: What is your first reaction to Brexit? Is this just a start and we should be prepared for more fissiparous tendencies in Europe as well?

A: I hope not. It certainly is a shock with the polls going the way they were but all of us sneakily suspected that the polls that we were getting didn’t reflect true intent including whether people would actually show up and as a result we might be confronted with this.

Hopefully saner minds prevail as we look back on this episode and in different countries people see the costs of leaving and therefore the fissiparous tendencies you talked about get diminished.

But since it also reflects the public mood it is something we have to pay attention to. It reflects mood of people who are tired of globalisation, who are tired of engaging with the world, who are tired of immigrants and that can mean a big change in the post war situation where a lot of prosperity was built on free trade and free movement of people.

Latha: But immediately what is the sense, Cameroon has been speaking about imminent recession in the UK. That can’t be ignored, that is at least something where you can’t bet but that is a definite scenario?

A: One of the thing that has been happening is that investment in the United Kingdom has been slowing because people are worried about whether the UK will continue to be part of the European Union (EU). But immediately what happens is the pound which has already depreciated significantly reflecting the fact that the UK runs a large current account deficit and with trade now being called into question a little bit there will be some concerns about how it will manage that current account deficit. And then as a consequence if you don’t want inflation perking up tremendously there may have some monetary policy reaction on the part of Bank of England. So, these are the kinds of concerns that people have, a drop in investment, perhaps, and I am putting this as a possibility, tighter monetary policy on part of the Bank of England. Put it all together and you don’t have a very attractive recipe for the UK in the short run.

Now, they have to get into negotiations, what this also does to the political establishment in the UK is anybody’s guess. But also how long the negotiations take and what kinds of opt outs, opt ins actually happen those are some of the things that market analysts will be paying attention to and certainly we are also.

Latha: What odds are you placing on a European recession? We all know the fissiparous tendencies out there. The Danes and the Dutch have been asking for referendum. The separatist parties in Italy and Spain have been gaining weight and not to speak of brightening chances of separatist parties in France as well. So, can all these be ignored now, wont they all get fodder?

A: They are there in place. So, one way of seeing the referendum right now is that it reflects a mood that already is there. Now, does it mean that the mood translates into political action which means more breakaway, more restrictions on trade and so on that we have to wait and see. Immediately in the Euro area you have seen the Euro actually depreciating against the dollar and the dollar strengthening. That in the short run be a silver lining. But in general yes, this is not good news for economic growth.

Latha: The previous crisis that we all want to hark back to is the Lehmann crisis. But that was still a financial crisis. Central bankers had to deal with it. But this is a political crisis. Political class has to deal with it and there the wounds run deep and solutions are not as immediate as printing notes or cutting rates. So, do you think that we are going to have a longish fall out of this Brexit event?

A: That is a good way of looking at it. It is not an immediate liquidity shock that goes through the entire system. Again we are all watching markets to make sure there aren’t any shocks that permeate. But it is more of a slow burning change reflected in this referendum and that change will affect economies fairly deeply if it goes through. That said we will also see political reactions in the opposite direction as people discover what the costs are of this kind of break away. So, it may be that overtime we have a more moderate muted change than certainly seems to be reflected today.

Latha: You are a long watcher of Europe. Several times in the past people have written off the Euro’s chances or at least diminished them. Do you think this is Euro’s biggest challenge now?

A: I think it is one of the big challenges. One could argue that Greece was a huge challenge and when Spain and Italy were also – the spreads were widening considerably that was also a challenge. So, the Euro project has been buffeted a lot in recent years, this is one more buffet. And they will figure out ways they are used to fairly dramatic events.

Latha: But do central bankers have a role here at all?

A: I think central bankers have played the role of calming markets and certainly providing liquidity in the short run and if necessary, if warranted accommodation and you saw that certainly in Lehmann and I don’t want to equate the two. They are fairly different events. But they did provide a lot of accommodation in the Lehmann event. Let us see how things proceed there. It is still very early, we are still getting instantaneous market reactions. But let us see, we are all watching all the markets, watching all the prices and trying to guess where the points of stress are.

Investors should stay away from mkt in near-term: Andrew Holland

Talking to CNBC-TV18, Andrew Holland, Chief Executive Officer (CEO), Ambit Investment Advisory, asks investors in India to stay away from the markets, till there is a reaction from Europe. There may be a long period of volatility in the markets, but he suggests staying away in the near-term.

Calling it a huge negative shock, he said the ramifications are going to be far reaching. The biggest fear he said would be if the entire Europe would disintegrate.

The UK banks are going to suffer. This will have an effect on the European banks as well.

Q: We were talking to you last week and you were hoping that it would be a Remain vote, how do you see markets moving from here now?

A: It is a huge negative shock to me and Udayan Mukherjee has hit the nail on the head, the ramifications are quite far reaching and apart from the very easy call that is got in referendum of the European countries but the UK voters — it is not just a vote against Europe, it is a vote against bioth the conservative and leadership and I think this is the problem that globally it has been Central Banks which have been indicating economic growth through their monetary policies, not politicians and I think people are tired of that because they are not seeing any benefits from it.

Q: We have been talking about this off air as well that how bigger risk Brexit was for the market, somehow global markets went into the event with a lot of complacency, do you see that shaking off now and how much more damage do you think the markets could see from hereon?

A: I think we could see a bit more damage. The opening of Europe is anywhere between 7 percent and 10 percent down but that is just in the rally up until Brexit. So I am already seeing rating agencies cut UK’s rating, there are brokers out there now cutting their economic forecast to 2017. So this is just a start.