See big rally 3 months on, whatever the earnings: Tata MF's Jain

The 41-year old Jain’s theory is based on the bet that governments in developed countries will switch to fiscal stimulus to revive their economies, since monetary stimuli by central banks have been shown to be largely ineffective.

- Santosh Nair Moneycontrol

Equities could struggle for the next three months, but when the dust settles down on demonetisation, and the (likely) US Fed rate hike is out of the way, Indian markets will do well even if there is no quick recovery in earnings, says Ritesh Jain, Chief Investment Officer, Tata Asset Management Company.

The 41-year-old Jain’s theory is based on the bet that governments in developed countries will switch to fiscal stimulus to revive their economies, since monetary stimuli by central banks have been shown to be largely ineffective.

“Onset of fiscal spending will push up inflation in the medium term and could hurt bond prices, but it will be good for equities in the initial phase,” Jain said in a free-wheeling chat with Moneycontrol.

US bond yields have firmed up in the last few days as analysts are expecting Trump’s fiscal policies—notably, increased infrastructure spend--to boost US economic growth and lift inflation.

“Early stage of inflation is good only for one asset class and that is equities,” says Jain, adding, “….USD 11 trillion of negative yield bonds are out there...some chunk of it will shift to global equities and some part of it could come to India, pushing up equity prices.”

Most analysts and fund managers have been bemoaning the in general high valuations of frontline Indian shares. Jain says that trend will persist because of heavy inflow of passive money (index funds and exchange traded funds) into these stocks.

"Expensive valuations are partly a function of passive funds doing well and drawing more money into them, forcing active fund managers as well to load up on index constituents," he says adding that this trend will continue for a while.

In the short-term, however, there could be pain for emerging markets in general. On Friday, emerging markets sold off as players bet that a sizeable chunk of global money is headed out of risk assets like emerging markets, into US government bonds because of better yields.

An avid marathon runner and squash player, Jain is a voracious reader of offbeat books and blogs. These days he professes to devote most of his reading time to books which deal with how dramatically society and the government’s role in it is rapidly changing.

He sees the move to demonetize Rs 500 and 1000 currency notes hurting demand and corporate earnings in the short term, but a longer term positive as it will attract more money into the financial system and also cool high real estate prices.

“In India, government spending will go up as demonetisation hits both nominal and real GDP and the resulting disinflation will further deter private spending at a time when capacity utilisation is only 68 percent,” says Jain.

As a result, he is bullish on public sector capital expenditure and the companies which will benefit from the spending.

He expects price earnings multiples of consumption theme sectors like auto, white goods, and jewellery to contract till some kind of fiscal policy support is evident.

“These companies could see derating till the Budget when I expect the government to announce measures to support growth,” he says.

Jain sees trouble for non-banking financial companies as well, also because many of them have loaned heavily to small and mid-sized companies against their property.

“I think NBFC sector had run ahead of fundamentals with lot of positive news built in,” says Jain.

“Demonetisation will not only reduce the balance sheet growth and hence earning growth we could also see some pressure on their asset quality which is not in the price,” he says.

Last month, India Ratings said in a report that delinquencies in the loan against property (LAP) portfolio, which have been modest till the last year, could significantly increase in the next four quarters on a combination of rising credit costs and stagnant property prices.

Jain feels demonetization will aggravate the problem as many small companies may face a squeeze on cash flows and could struggle to service their loans.