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Bad news of global recession can be good news for Indian economy: Sunil Subramaniam.


Date: 02-09-2022
Subject: Bad news of global recession can be good news for Indian economy: Sunil Subramaniam
“I view the recessionary forces in the advanced economies as a huge boost to FIIs looking at India very attractively and coming back of the flows that went out between October and June. To me that is a strong market positive to the extent that the bad news of recession is good news for Indian markets,” says Sunil Subramaniam, MD & CEO, Sundaram Mutual

There are two reasons for it – one is, of course, markets are up. Second is we are just closing our NFO and the counting is still on but we have just crossed Rs 1,600 crore in collection so absolutely thrilled with that kind of number.

No, last time I collected Rs 600 crore only in the blue chip, large cap fund. I have collected two-and-a-half times that now.

When we started the road shows around the middle of July, the markets were all red and we were saying we will deploy all of this immediately but since then, the markets have risen like this. So obviously the fund manager will take a tactical call because while our long-term story on India remains bullish, some part of the gains have happened in the recent past in the market. We still retain confidence that this is just a beginning of reasonably long bullish run for the simple reason that in Octo ..

From July 1 to now, about Rs 55,000 crore has come back in. There are two ways to look at it.

We will say Rs 55,000 crore has come in but the other way to say it is still Rs 2 lakh crore is yet to come in.

Where did that money go from our markets? Some of it went back to the US into bonds because the US interest rates were rising but a majority of it went into commodity exporting markets because in times of rising commodities, the hot money FPIs, the hedge funds reallocated from commodity importers like India to commodity exporters. Now that trend is getting reversed because with the rate hike programme firmly in place, a recession is almost guaranteed to be instituted for inflation to come down.  ..

The rate hikes can cut demand side inflation down significantly and maybe bring it down to about 3.5-4% level. But the inflation comes down from 3.5% to 2% only if supply inflation comes down, which can only happen if demand goes to minus 3% in the US. That kind of hard recession will kill oil demand and bring down prices.

Such a scenario is playing out and it got reinforced from the Jackson Hole conference. That is beautifully positive for a commodity importer like India. What more could you ask for? This reallocation of capital flows within emerging markets will take our market to newer highs.

IT companies are still not indicating or admitting there is a problem. But pure news headlines coming from Europe and the US look like we could be in for not only economic contraction but also a spending contraction. How do you see that leg of the market moving given how macro headwinds have historically impacted this sector?

But I do not know why you are thinking of economic contraction? Where did you get that kind of feeling?

I am talking about the economic contraction in the US and in Europe. If that happens, obviously it will have an impact on the IT sector because historically we have seen that?

Yes, undoubtedly. What happens is that you have to realise that the IT sector during the Covid period unnaturally turned into a growth sector. Historically, it has been a safe sector, you can expect 10-12% steady Hindu plus rate of growth. During the Covid they saw this huge opportunity and went up. All it is doing is getting back to being a safety sector. So, to that extent, there is a bottom to IT. It cannot have a free fall like the cyclicals during a downturn in the economy.

IT is a safety play at the end of the day. So whatever you see in terms of the US economy going into recession will mean a reduction in IT exports, but that will only take IT back to a safety zone from a growth zone, which was projected on their numbers.

IT growth is going to de-grow, it is not going to have negative returns. So that readjustment in IT valuations is bound to happen and that will make sure that overall the Nifty, Sensex growth will not be maybe as much but there are enough sectors which are not linked to the US economy like automobiles, consumer discretionary, housing etc.

The Bangalore market is IT driven but look at it from this perspective; in a recession, the cost consciousness of an importing country goes up even more than the advanced countries. This cost consciousness is where they want to switch from the existing high cost. IT plays a role in terms of reducing infrastructure cost for user companies. That is why I am saying IT is a safety play, it is not just a super growth play.

So, export oriented sectors would definitely get impacted by an advanced economy recession. Hence those valuations will not rise, but overall how big is exports in the Indian economy? Also, recession will mean commodity prices crashing, oil prices coming down and a number of industries here which use crude and related derivatives in their inputs whether it is auto, paints, fertiliser, FMCG goods and food prices.

We will see the margin relaxation on the EPS front which was a big factor just a few months ago. All the commodities would rise. We were worried about margins on FMCG and auto.

Today the situation has reversed and they now get the margin cushion. If they need to use pricing power to boost demand by giving discounts, they have the power today. I view the recessionary forces in the advanced economies as a huge boost to FIIs looking at India very attractively and coming back of the flows that went out between October and June. To me that is a strong market positive to the extent that the bad news of recession is good news for Indian markets.

Source Name:-Economic Times
 
 
 

 
 
 
 
 
 
 
  

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