Neelkanth Mishra Breaks Down What's Happening In China Markets & Sectors On His Watchlist
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00:00Two crucial state election counting going on today and we have seen quite a change in
00:18momentum as far as Haryana is concerned.
00:21The latest numbers from Haryana are showing a much closer fight than expected.
00:27In fact, we are looking possibly at a split verdict.
00:31Now the BJP at 43 seats out of 90, remember 45 required for the majority mark, the Congress
00:39and allies at 42 seats.
00:41This same picture just a few minutes ago and I would say maybe about 20-25 minutes ago
00:47was completely different.
00:49So as the rounds of counting of votes has continued, the BJP has made quite a spectacular
00:56comeback.
00:57Remember, we still are waiting for the final results to be declared by the Election Commission
01:01but having said that, we are looking poised for a possible hat-trick, a possible third
01:08term of the BJP if they are only two seats short.
01:12The INLD Plus has two and others have three.
01:16The JJP which was an ally of the BJP has not opened its scorecard at all in this round
01:24of state elections.
01:25Now, why have we been talking about Haryana and why is it something that the markets are
01:28also looking at?
01:30Haryana is the first head-to-head electoral contest between the BJP and the Congress since
01:36the last Lok Sabha elections.
01:38This is why it was also being watched very, very carefully and the results of this are
01:43also going to be extrapolated to see what the national mood is, which is why Haryana
01:47becomes crucial and these numbers become crucial.
01:50In fact, let me pull up and show you what the market has been doing in the last 20 minutes
01:55corresponding with the change in the kind of numbers that we are seeing coming out of
01:59Haryana and that is quite interesting as well.
02:01The recovery on the Nifty has been phenomenal.
02:04Look at that intraday chart, the Nifty now in the green.
02:08Pull up the Bank Nifty as well and some of the other indices that we have seen, Nifty,
02:14Bank Nifty and Sensex, all of them showing fair amount of recovery.
02:19The Sensex also about half percent up, the Nifty Midcap 150, beg your pardon, about half
02:24percent up.
02:25Now, we have been talking about Haryana, let me also come back to JNK if we can.
02:29The Jammu and Kashmir election is also very important, it is the first one since the abrogation
02:35of 370 and is really a testimony to the working of democracy in India, leads for all 90 seats
02:44is out now.
02:45The Congress NC Alliance, that is the National Conference Alliance has taken the front row
02:51over here with 52 seats and 45 is the halfway mark.
02:55So they seem fairly comfortably poised to form the government there in what is now a
03:00union territory of Jammu and Kashmir.
03:02But when it comes to Haryana, it is a different picture altogether.
03:08I would reckon that this is the important thing which has boosted the markets in the
03:11last few minutes, quite a turn of events.
03:15The Nifty Intraday Asthamanna mark just shows how the market's mood changed completely.
03:21So twin effects today, this morning, right?
03:23China stimulus measures not quite enough, that gave a bit of a leg up.
03:27The Haryana election result, close.
03:30So definitely a positive surprise from an incumbent party's perspective.
03:33So I think both of those factors have aided the market.
03:36So in light of this, before we get in our guest, let's just try and talk about the two
03:39or three things which should be top of mind as well.
03:41Remember, Mahindra and Mahindra has seen a good move today.
03:44I reckon part of it is because of the CLSA upgrade that is coming today.
03:48Puneet Johnson, you tell us what are the key reasons in that CLSA node?
03:54Puneet, good morning.
03:55Hi, Nilesh.
03:56Good morning.
03:57So it's also a very big upgrade that's coming from CLSA on Mahindra and Mahindra.
04:00They've upgraded from a hold rating to an outperformed rating and the target price has
04:04also increased from roughly about 2650 rupees to 3400 now.
04:10Do note that, you know, there is a new analyst that's come in now.
04:12So that also might be one of the key factors.
04:15But the company, but the brokerage has highlighted that, you know, the improved scale, a superior
04:19mix as well as a better pricing for SUVs has aided margins over the last couple of years
04:24for Mahindra and Mahindra.
04:25That's also backed by stronger launches of the XUV700 and the Thar Rocks that we just
04:29spoke about.
04:30Now, upcoming EV models is something that they've highlighted that expects to spruce
04:34up M&M's SUV models and as well as average selling price is also going to be increased
04:39because of this.
04:40They say that, you know, they are keeping segmental EBIT margin guidance of about 9%
04:44over the next couple of years, which also leaves room for some consensus upgrades.
04:48Just on tractors, they have mentioned that, you know, the last couple of years volumes
04:51have been flat largely and that augurs well for the company because they're expecting
04:56domestic volume growth in FI26 and that's, you know, something that we need to watch
05:01out for.
05:02That's going to be one of the key drivers as well.
05:03Finally, what's the guidance?
05:04They've said that structural improvement in SUV market share, better product mix will
05:08also be one of the things to watch out for.
05:11And the current PE, the target price of Rs 3,400 is based on the forward PE multiple
05:15of about 26 times of FI26.
05:18That's higher than the 18 times which was between FI18 and FI22.
05:21But owing to companies, you know, outperformance over the last couple of years, they've, you
05:25know, given it a higher PE multiple of 26 times.
05:28Back to you.
05:29All right.
05:30So, CLSE on M&M has boosted at least M&M this morning.
05:36So, some of the market movers after the first bit of trade and that's what we're focusing
05:40on.
05:41Trent is definitely one of them.
05:42Mahima is joining us for more on that.
05:44Mahima, interesting note out from Kotak on Trent as well.
05:47That's stock up a percent and a half.
05:49Yes, absolutely, Tamana.
05:50So, Trent has launched a lab-grown diamond jewellery brand called Poem and this they'll
05:56be selling in the Westside stores.
05:58Now, they're expecting the rollout in the next one to two years and this development
06:02reinforces a cautious stance on Titan now.
06:06What Kotak is saying that it expects direct or indirect impact of LGDs to weigh on Tanishq's
06:10studded growth and profitability starting from Q2 itself.
06:14Now, what they're saying is that the brand Poem offers LGD jewellery at a significant
06:21lower prices than natural diamond.
06:24The estimated prices right now of one carat solitary ring are priced between 24,000 to
06:2929,000 which implies an underlying retail price of around 15,000.
06:34So, what Kotak believes is that Poem has a potential to be a studio of lab-grown diamonds
06:40in the jewellery market and lab-grown diamonds somehow can disrupt every jewellery segment
06:46that is present through Titan that is Mia, Carrot Line which is everyday jewellery basically
06:50is what Kotak is expecting and of course it will also impact their overall solitary business
06:56as well.
06:57So, this is the overall note and in fact, you know, while Titan is not, you know, foraying
07:03into lab-grown diamond itself, Trent might use the back-end facilities provided by Trent
07:10to grow the lab-grown diamond space via the Westside stores.
07:14Okay, thank you for that.
07:18Myman, we'll come back to you in just a minute or so on Naica as well.
07:22Your call absolutely bang on, on how the street would view Naica's numbers, we'll come
07:27back on that.
07:28But, you know, the other big factor today as Neeraj you mentioned is China, so on one
07:32hand you have voters of Haryana and the other hand you have the Chinese planning body which
07:39is moving the markets and, you know, this is when you see interesting kind of trends
07:44coming in.
07:45But Chinese markets re-opened today after a week and completely with a bang, not necessarily
07:54in a good way.
07:55There was a very crucial meeting of China's stock planning body which came out and spoke
08:00about their vision on what they're going to do to boost China's economy.
08:06This has been described by most analysts as underwhelming, a lot more was expected.
08:11Shanghai is still about 5% up but look at the Hang Seng, it's really been hurting, Nikkei
08:15hurting as well.
08:17The China versus India trade that now becomes a focus point.
08:22Remember, India was hurting, at least Indian equity markets were hurting because a lot
08:27of foreign flows were getting pulled out of India and directed towards China.
08:31Is that trend reversing?
08:32Rucha is joining us now to tell us if India's outflows were becoming inflows for China and
08:39what we could see now.
08:41Right, so the Chinese market re-opened after seven days of holiday and then let's have
08:46a look at how did the Chinese market fare before going into this kind of holiday.
08:50Well, the CSI 300 index surged around 25% just in a week's time and the Hang Seng index
08:57surged about 9% during the time when the Chinese markets were closed.
09:02So this was a very good start to the Chinese economy in the morning.
09:07But we'll also look at how the Indian markets did.
09:10The Indian benchmarks, however, weakened in the same period.
09:13Nifty was off around 6%, 5.5% to be precise, from life highs made on 27th September.
09:21But then we'll have a look at the kind of FI selling that happened in India, where FI
09:26sold over 30,000 crore from the Indian equity markets in October.
09:31So this is largely looking out to be like the FIs are taking their money out of India
09:35and then putting into Chinese markets.
09:38If we can roll over to the next slide, we'll see what kind of reforms were made in the
09:44Chinese market.
09:45But before that, let's move on.
09:47Let's talk about the Golden Week holiday.
09:49Well, October 1 to 7 were closed for the Chinese markets because of the Golden Week holiday,
09:53as I mentioned.
09:55And there were the latest reforms.
09:56There were three reforms that the Chinese economy, the Chinese central government made.
10:01Number one is that they lowered the reserve requirement by half a percentage point and
10:04this boosted the liquidity in the Chinese market.
10:08This was followed by the benchmark interest rates being cut by about 20 basis points to
10:121.5%.
10:13But the major reform was made in the housing sector.
10:16Well, they removed the floor on mortgage rates, number one, and they also removed restrictions
10:22on buying second homes.
10:23So this was a major stimulus to the housing market.
10:27And this also weighed on the metal index as well.
10:30Well, the Chinese stocks actually gave up the gains as the NDRC underwhelmed at the
10:37briefing today morning.
10:38Well, the market was expecting major reforms in the meeting today, but that didn't happen
10:43and disappointed the street.
10:45Well, previous reforms were, however, reiterated.
10:48So that is negative, is what the street believed in the morning.
10:54And that is why the Hansen index actually slumped down to about 7 to 8%.
10:59But let's talk about what CLSA believes on Chinese and the Indian economy.
11:03Well, in the model portfolio, they have raised China to 5% overweight by reducing their overweight
11:10on India to 10% from the previous 20% that they have.
11:14Now, this is on the back of three reasons, largely on valuations.
11:18They believe that the PE discount that China has in relation to India is at 53%.
11:24The PV, that is price to book discount, is at around 64%.
11:27And it also gives two times the dividend yield than India.
11:31So these are positives for the Chinese economy as against India.
11:35And they also reiterated three key which is, as the CLSA pointed out, number one is that
11:40the market is liable to be saturated by the new IPO issuances, you know, that are coming
11:45in in the equity markets.
11:48Next one is that it also states that rupee is vulnerable to elevated prices.
11:52And lastly, we'll see that how SEBI has curbed the retail derivatives and that could impact
11:58the participation of retail investors into the Indian equity markets.
12:02But lastly, let's talk about the positives of the Indian economy.
12:04Well, CLSA believes that this one is just temporary for the Indian markets and India
12:09still offers the best emerging market growth strategy.
12:13And as I mentioned, this does a temporary reduction is what the brokerage house believes.
12:17And lastly, in terms of ROE, that is return on equity, well, India's return on equity
12:22is better than China at around 15.5% versus 11% that China offers.
12:26But temporary, yes, in the near term, China is gaining at the expense of India.
12:31But this is just temporary is what CLSA believes.
12:34Yeah, okay.
12:35And all of that has changed.
12:36I mean, things moving so quickly, Rucha.
12:38So all of that has changed actually in the last couple of hours, because of some of the
12:44statements made from China's top planning body this morning.
12:48And that is something that we should focus on.
12:51As a result, metals doing fairly badly as well.
12:54But let's focus on what's happening with markets right now and look at HDFC Bank roaring.
12:59And that's really an interesting story to track.
13:02HDFC Bank completely pulled back after, you know, being hammered.
13:08Markets back above the 24,800 point, obviously far from the lofty days of 26,000 on the nifty.
13:14But looking at the way things have been going, I would reckon Neeraj, this is not half bad
13:19at all.
13:20And HDFC Bank leading that path.
13:23Let's pull up top nifty contributors just for a second and see what's happening there.
13:27Look at Adani Ports now.
13:29Top nifty gainer, nearly 2% up, 1.5% up.
13:33So you have your back to basics kind of a mood this morning.
13:38HDFC Access Bank, HUL booming, L&T, so your infra plays, focus on old economy, banking,
13:47all of that coming back.
13:49Infosys TCS hurting, and I think with a bond yield at 4%, that's going to continue to happen
13:54as US markets hurt.
13:56They're not out of the woods yet in the US, and that definitely is a pain point for Indian
14:02IT companies.
14:03Yeah, and interesting.
14:04I mean, kudos to Himen.
14:05When we meet him next week, we'll tell him kudos because he gave a call yesterday on
14:09buying into Adani Ports, Tamanna, at closing BTST call.
14:13And that stock is really doing well.
14:15So some of those brave calls have turned out well.
14:19So good going there.
14:21But not such a great day for Naica, unfortunately.
14:24And Mahima is waiting by to tell us about what the numbers were like.
14:30Also, what has the brokerage verdict been there, Mahima?
14:33Soft performance by Naica.
14:35Is it warranted because of the quarterly update?
14:39Absolutely, Neeraj.
14:41So it has reported mid-20 net revenue growth in Q2.
14:45However, this is not in line with the FY25 guidance that Naica has already given in the
14:49start of FY25.
14:50Now, Beauty Vertical has seen mid-20 growth, but Fashion Vertical is only in early teens,
14:57which is why the stock is under pressure.
14:58Now, in terms of what brokerages are interpreting from the Q2 business update, well, Citi has
15:05rated itself with a target price of 165.
15:07They're expecting revenue growth at 25%.
15:11And what they're seeing is that they're expecting EBITDA margins to be up around 100 basis points
15:14QOQ, but strong momentum in BPCs, but there is sustained weakness in Fashion Vertical
15:20is what they're saying.
15:21And they believe that 60 times EBITDA valuation right now is reasonable as compared to the
15:26other traditional businesses and not the new-age tech, the growth at which new-age tech platforms
15:32are growing.
15:33Now, what they've said is that in Fashion, they're building a growth of around 20% YOY
15:39and they expect steady expansion margins, but they expect decline in segment EBITDA
15:44losses and overall Fashion business remains under pressure.
15:48Now, Nomura and Naica has also retained it neutral with a target price of 203.
15:52They're overall expecting consolidated growth at around 26%.
15:57What they're saying is that Q2 expectations are lower as compared to FY25 expectations
16:01for revenue and margins, and they're seeing downside risks if recovery is not stronger
16:07in the second half of FY25.
16:09They're factoring a 29% growth in gross merchandise value of beauty and personal care, and in
16:17Fashion category, they're expecting weaker Q2 trends with 11% YOY growth in the gross
16:22merchandise value.
16:23So this is the overall view of the Q2 update and of course why it's under pressure today.
16:29All right.
16:30Thank you for that, Mahima.
16:32The big story this morning, and a few big stories actually this morning, it's an interesting
16:36morning for the markets.
16:37You've had narrative and statements out of China talking about what they will do to fix
16:44their economy.
16:45The street didn't take to it, and you had Chinese markets that have opened after a week
16:50taking a knock to the chin.
16:52As far as India is concerned, two key state election results in focus, and what a turnaround
16:58on the state of Haryana in the last few minutes, 48 seats for the BJP right now, Congress at
17:0235.
17:03That's the latest tally that I'm seeing on the screen out of 90 seats.
17:06That means the BJP has crossed the halfway mark and is now poised to form a state government
17:12in Haryana for the third consecutive term.
17:16So much to talk about with our next guest.
17:19Completely excited to have you on air, Neelkanth Mishra, Chief Economist, Access Bank and Head
17:23Global Research, and couldn't have asked for a better time to speak with you, Neelkanth.
17:28Thank you so much for joining us.
17:29I hope you don't mind.
17:31I'm going to take the liberty to ask you about the kind of election results we've seen, and
17:36let me contextualize it.
17:38The concerns post the Lok Sabha results have been that there will be a pivot to populism
17:43or populist welfarism kind of policies.
17:49That may be the concern if the Haryana election result would have also seen the defeat of
17:55a BJP government there.
17:57Is that a concern now that goes back to the drawing board?
18:02Frankly, that concern was actually misplaced.
18:06So we saw that the central government continued along its fiscal consolidation paths in the
18:12July budget.
18:13In fact, they further reduced the fiscal deficit.
18:17At the same time, what you will see at the state level across states is that more and
18:24more states are now offering income transfer schemes.
18:27So when Maharashtra did it in July, it was the 10th state in India to launch an income
18:32transfer scheme.
18:33In fact, both parties in Haryana, both parties in Jammu and Kashmir, and now both parties
18:39in or both alliances in Jharkhand are offering income transfer schemes.
18:45So the fact that at this stage of development in the economy, the growth in income inequality
18:51is given, there will be political response to it.
18:55So I think that's starting to happen at the state level.
18:58In aggregate, if you add the Odisha program, about 1.9 lakh crores, 1.9 trillion rupees,
19:06more than 0.6 percent of GDP, is the income transfer happening to poor women across 11
19:12states.
19:13And now after these state elections, maybe 13, 14 states will be added.
19:18More than 18 percent of India's women are now getting income transfer.
19:23So that's a separate thing, but if it happens at the state level, given that state deficits
19:29are capped at 3 percent of GSTP, I think at an aggregate fiscal level, that's less of
19:35a concern.
19:36So frankly, I would not correlate these results with the narrative on fiscal policy.
19:42Okay.
19:43So fair enough.
19:44And you know, the fiscal policy and welfarism directed at women and households is not necessarily
19:49a bad thing.
19:50Maybe it is something that we need.
19:51Time to re-look at what we look at as bad welfare measures and good welfare measures.
19:57But just one more comment from you, Neelkanth, on the elections as they were.
20:01Why does this become important to track from a policy economy perspective?
20:07Because at the end of the day, it's one state.
20:08It's Haryana and Jammu Kashmir, of course, after 370 going to polls.
20:13But why do you think that the results become so crucial?
20:17Frankly, the results are very crucial for the states of Haryana and Jammu Kashmir.
20:23I'm not convinced that they really have a big bearing on what happens at a national
20:28level.
20:29There are political issues about, you know, the relative momentum, how vociferous the
20:36opposition is, how the government thinks about the process of reform.
20:41But frankly, I mean, my own interpretation of this is that these are, we have significant
20:47political repercussions.
20:48But as we think about the economy and the markets, they do matter for the people of
20:52Haryana and Jammu Kashmir.
20:54But for the economy and the markets as it relates to the rest of the country, I think
20:58the impact would be relatively minor.
21:00Neelkanth, good morning, Neeraj here.
21:04Trying to understand, Neelkanth, because it's a bit perplexing to try and decipher what
21:10China is doing and the resultant impact on markets and global economy.
21:16There was a note that I read which said that maybe China is not trying to stimulate the
21:19economy.
21:20It is trying to stimulate the stock markets and the economy might follow suit or the confidence
21:24in the economy might follow suit.
21:26And today's comments in some people's terms were underwhelming from the NDRC.
21:32How have you thought about this whole piece and the resultant impact on Chinese economy
21:37and markets and Indian economy and markets?
21:40Yeah, that's a great question.
21:44We all have to understand from a distance what the Chinese policymakers may be thinking
21:51about.
21:52I think what is very clear is that they are struggling with deflation.
21:58And we have seen, courtesy what happened in Japan, how bad it can be for the economy when
22:05deflation starts.
22:06So over the last six, nine months, we've heard of spicy hot pot chains cutting prices, coffee
22:14chains trying to cut prices.
22:17And when restaurant prices start to fall, it's a very, very negative sign in the sense
22:21that it suggests very weak consumer confidence.
22:26It suggests deflationary pressures on wages.
22:28So I think the first – and given how much of debt that exists in China, this would be
22:34very dangerous.
22:36So the first objective of the Chinese government is – the Chinese policymakers is to reduce
22:42deflation or at least bring back inflation, which is why the bazooka on the monetary side
22:48was very strong.
22:50And as you can imagine, because stock markets, equity prices are financial asset, the impact
22:57on them was very significant.
23:00Now, when the challenge for the economy is aggregate demand, and the government has kind
23:08of given up on trying to stimulate consumption demand because that is generally fiscally
23:12messy – and maybe I'll come to that in half a minute – but they were, for a long time,
23:17trying to boost aggregate demand by getting housing to move.
23:21And over the last two years, three years, they've sort of de-emphasized that.
23:25Then a lot of the bank lending was going towards industrial capacity.
23:30It was growing at 25, 30 percent a year.
23:32The loans to industry were growing at 25, 30 percent a year.
23:36But over the last six, nine months, we have seen that every single industry, from electric
23:40vehicles to battery storage to solar panels – all of these are very important sectors
23:45of the future, but the companies are now really bleeding, and so they're not interested in
23:50taking more loans to set up more capacity.
23:53And therefore, their base money growth is 12 percent.
23:58Their broad money growth, so M2 growth, is 6 percent.
24:00So there is – because loan growth is falling, the central bank is injecting more money,
24:07but the banking system is not creating enough because there's not enough demand for credit.
24:11Now this is a very dangerous situation if you have such high levels of net GDP.
24:15Therefore, the first response they had was a very aggressive monetary one.
24:20The challenge is, and the problem is, that what the economy needs is a very strong fiscal
24:25response.
24:26Now, the fiscal response, and which is why the market is disappointed, is not coming
24:30through because fiscal responses or fiscal moves are generally very messy politically.
24:36Because what you're trying to do is take from one hand and give to the other.
24:41Monetary is generally – there is a problem for savers to cut interest rates, but given
24:46that there's so much financial depression anyway.
24:48So their objective is to get inflation back.
24:51I don't think they are now – given that unemployment is not a big issue and the population
24:55is falling, I don't think we should have expected a very big fiscal response.
25:00Got it.
25:01So, Nilkanth, if that is the case, what happens next?
25:04Since that has not happened, the call by some people is that there is a reallocation which
25:10is real and which will continue.
25:12I'm trying to understand from a market's perspective, do you think this reallocation
25:17is real and will it continue?
25:19And therefore, do economies or markets like India continue to suffer in this reallocation
25:24move if you indeed believe in the same?
25:29I don't think the India sell-off by foreigners was directly linked to creating space for
25:35buying into Chinese equities.
25:37And frankly, even the correction we are seeing today is, you know, if something moves up
25:4125 percent, a lot of the people who were kind of anticipating this or had been stuck in
25:48it would try to exit.
25:50So a sharp move up and a sharp move down, frankly, it's not a sign of anything for
25:55The problems in India, I think, are also – I think in the near term we are seeing the economy
26:03slow down quite meaningfully.
26:06Many high-frequency indicators have worsened meaningfully in the last four, five months.
26:13And our expectation is that this is temporary and as the government fiscal spending picks
26:17up, as the RBI is signaling that on the quantitative side of money they are easing a bit, all of
26:25those start to flow through.
26:27The economy should revive starting January.
26:30But yeah, but I think the result season is, I think, going to drive cuts in earnings.
26:36So some of what we are seeing in India is a reflection of our own weak economy and not
26:41so much about people just dumping India to buy China.
26:47Now, given that the Chinese government has shown – so, so far they were least interested
26:52in these things – given that they have shown that they want to bring inflation back and
26:57then stabilize the economy, and Chinese equities were very cheap, and therefore some reallocation
27:03may be permanent.
27:04I mean, I don't think we will go back to those kind of D multiples again.
27:07No, just on the point on the Indian economy, Neelkanth, early days in terms of the business
27:16updates we've seen.
27:17So, I mean, unless you have a view, I won't press you on that.
27:20But I'm wondering whether the rural recovery narrative and hope was a little premature
27:27or is that yet to play out?
27:30See, I have held a view for the last several years, and it's not a very popular view,
27:38is that the rural and urban divide is blurring.
27:44And this axis of rural is doing well or urban is not doing well and vice versa is something
27:51that analytically has lost value in the sense that if someone – now that every village
27:57is connected to the nearby city, if someone picks up their motorcycle – now every household
28:02seems to have a motorcycle for a large number of households – and buys, goes to the nearest
28:07possible fossil town and buys something, is that urban consumption or rural consumption?
28:10I think what is more interesting is lower income versus upper income.
28:15And what we have seen in the last four or five months is that the lower income consumption,
28:21which was very weak, has kind of stabilized.
28:24The upper income consumption, therefore, you know, car demand, the demand for many of the
28:28consumer goods, retail sales in modern stores, those have actually – were very strong and
28:33then actually started to weaken.
28:36What should we think about going forward?
28:39I think the slowdown that we have seen is because of a very negative fiscal impulse.
28:47Last year's central and state government spending was front-loaded.
28:50This year, central and state government spending is back-loaded because of elections and then
28:55some rejigs happening in various governments.
29:00I think the spending pool is there, and as the spending picks up, I expect that the upper
29:07and middle income consumption will again strengthen.
29:10Remember that for the next several years, labor will be in surplus and capital will
29:15be in shortage.
29:16So, we are going through that phase of economic development where the bargaining power of
29:21labor will be lower than the bargaining power of capital, and that's generally a sign that
29:26upper and middle income consumption will do better than lower income consumption.
29:29So, that's an axis I find useful, and that's why I was never in the camp that this so-called
29:35rural recovery will happen, and I'm not surprised that it has been actually quite difficult.
29:39Yeah, but in terms of earnings, in terms of earnings overall, I mean, because that's the
29:44next thing that, you know, we all will move to and focus to, where are you anticipating
29:51the weakness to really show or the cracks to really show?
29:53Are you sharing the concerns about deposit growth when it comes to financials or to autos
30:00or some of these segments that have been quite heated?
30:04So, the second quarter numbers, so as the previews have started getting published, we
30:11have seen cuts happening to industrials, to financials, to autos, to cement, so several
30:17sectors.
30:17In fact, even consumer staples, many companies have seen cuts, barring a few, like, say,
30:25jewelry, et cetera, where the growth has been – the quarterly top-line updates have been
30:29slightly better than expected.
30:31I think everywhere we have seen weakness, and so the cuts will be broad-based, but I
30:37must say that these will be backward-looking in the sense that as the RBI signals through,
30:45persistent overnight surpluses or liquidity surpluses in the overnight market, and quite
30:52possibly as we see the MPC, the new MPC give its comments tomorrow, our expectation is
31:00that they will at least change the stance.
31:02And so, as the monetary conditions ease, and this is a time where they should be easing
31:07given that global conditions have eased with the Fed cutting rates, I don't think there
31:12will be cutting rates, like the MPC will be cutting rates, but on the quantitative side,
31:17I do expect some easing to happen.
31:20And that is why I think the bank earnings, the cuts that we have seen, should be more
31:26backward-looking.
31:27Same for industrials.
31:28In our view, the capex cycle has turned, the real estate cycle has turned, the power generation
31:32cycle has turned, and as the launches, the pre-launches, and the sales start to translate
31:39into construction, you will see the economy getting some momentum back.
31:44So, for many of these sectors, as the market starts to get worried about the pace of earnings
31:49cuts or very poor results for the September quarter, and frankly, I think GDP growth in
31:53the September quarter could also be very weak.
31:55For some of these sectors, I would be actually buying into that sell-off, because I expect
31:59that with fiscal and monetary easing, the economy should start showing good signs of
32:04recovery by January.
32:05Buying into the sell-off, that's interesting.
32:08Neelkanth Mishra, I have two questions.
32:10My last question is on metals.
32:13But before that, I'll just link to your current answer.
32:16I would love to understand.
32:17Economists are notorious for being a lot more cautious.
32:20You combine with aplomb the qualities of an economist and a market watcher, too.
32:24I would love to understand, because I looked at your report, which on 17th October, right,
32:29wherein you mentioned that the global capex, or the Indian capex cycle has truly started.
32:33Where is it that you believe there is a higher probability of consistent economic growth
32:40and investability options?
32:42Is it power generation?
32:43Is it real estate?
32:44Are there some other capex-linked sectors which provide this?
32:49No, that's a very important question.
32:52Before we see what is going to happen in the future, it's very important to understand
32:58what happened in the past.
32:59In fact, the growth slowdown that we saw between 2012 and 2021-2022 was an investment
33:07ratio falling from 34% to 27%.
33:11Of that 7% decline, 5% was the decline in household investment in real estate.
33:163.5% was government and public sector and private sector investment in machinery.
33:22And there were increases happening as the government built infrastructure.
33:26Now, so often – so you can imagine that 5% of that 7% was just household investment
33:32in real estate.
33:33So I think that is the strongest change that I expect will drive the economy in the next
33:39couple of years.
33:40Anything which is a construction proxy, and I think with cement, you know, profitability
33:45being at a decade low, even upper ton, currently volume growth is very weak.
33:49I think the sector has been somewhat weak as a result of that.
33:54In our view, as construction picks up, I think that would be a good proxy.
33:59On the power generation side, you see, any economy, as it grows, it requires more energy.
34:05Incrementally, I think the share of electricity is going to be higher.
34:09And therefore, we are going to need a lot of capacity.
34:11In the last seven, eight years, we have not added much.
34:14Some of these stocks are very expensive.
34:16So maybe the current weakness in power demand, where we are seeing negative numbers in
34:23September and saw negative numbers in August, albeit on a high base, can actually set the
34:28stage for some reasonable recovery as the next year comes closer.
34:33So these would be the sectors that I would look at.
34:37Some of the machinery stocks can also be beneficiaries of this.
34:42Not so much metals, because the steel in particular, I think given what's happening in
34:48China, given that the Chinese desire is to just bring some inflation back and not really
34:57start investments in real estate.
35:00And sales of real estate are down by two thirds.
35:03I think construction activity is going to fall off.
35:05I think the long-awaited slowdown in Chinese metals and steel demand is now upon us.
35:10And that's something that can be an overhang on the profitability of Indian steel companies.
35:15I must ask you, Neelkanth, how are you feeling about IT?
35:18This is supposed to be the recovery quarter.
35:21So much that has changed in the US markets as well, that has become a little positive.
35:27Do you think that flows in for Indian IT companies or we still have to wait and see those
35:31green shoots actually show?
35:35So the sector has already done pretty well.
35:39So as the inflows into Indian equities continue, even through the period of economic
35:46weakness, I think most domestic fund managers have already rotated into the defensive.
35:52So what we have seen over the last four months is that IT, staples, pharma, they've all done
35:58well, despite the fact that there is not any meaningful change in their earnings trajectory.
36:03In fact, staples earnings by consensus are still seeing cuts, pharma earnings have not
36:07changed at all.
36:08IT has seen a bit of upgrade, but very, very minor, not justifying 25, 30 times forward
36:13earnings.
36:14So even if a recovery was to happen, while incrementally it would be positive news for
36:19the market, and maybe the stocks can respond to that.
36:22But I think the sector is really expensive.
36:25What has happened though, you're right, is that the growth prospects for the US economy
36:32have turned out to be, I mean, they're showing much more resilience than we had expected.
36:38We have to see what is driving this.
36:41Remember that in the last two years, their fiscal deficit has expanded quite sharply.
36:48So just like the sharp fiscal contraction in India in the last four, five months has
36:53driven a slowdown in the domestic economy here.
36:56It was the sharp rise in the fiscal deficit in the US economy, which actually has supported
37:01their growth.
37:02So we don't know if in the last months of the fiscal year, which is for them September,
37:07they actually had a much higher fiscal deficit.
37:08We'll see the data tonight.
37:10But there are several drivers there.
37:12I'm not convinced that the IT sector's volume growth numbers in the next year or two are
37:18going to be meaningfully better than what they reported, and which is why we are underweight
37:22in the sector.
37:24Absolutely.
37:24Thank you so much for your time.
37:26Neelkanth Mishra there, Chief Economist, Axis Bank and Head Global Research at Axis Capital.
37:30Always a pleasure to speak with you.
37:32And great to have you on today on, I think, what is a very, very important day for
37:36markets to figure out what exactly is happening.
37:39We'll wrap it here, but we are closing off at least this leg of the show with the Nifty
37:46half a percent up.
37:47But after this break, we shift our focus to the F&O side of things.
37:51Stay tuned.
37:52A lot more coming up on the other side on NDTV Profit.