Subbu's views on the Indian economy for FY 2015

Mr. I V Subramaniam, Director-Quantum AMC shares his views on India’s sustainable earnings and global economic health in the year 2015.

• Year 2014 has been good for the global markets both Equity and Debt, including India. How do you see 2015 given the way the global economic and political landscape is shaping?

I do not have a view on one-year to predict the outcome for 2015. Our view is that overall markets look a tad expensive compared to the underlying earnings growth. Till date, investors by and large have focused on hopes and have ignored the disappointing earnings trend visible on an YTD basis. Unless earnings number shows sign of dramatic improvement there is large scope for disappointment in equity returns. The consensus expectation for CY2015 was close to 20 per cent till December 2014, but is now revised downwards to 9%. In a normal situation, market would have declined sharply given this downgrade but it chose to ignore. I believe India's sustainable earnings growth for the long term is 15-16 per cent and it will take a few more quarters before we see that kind of trend emerging.

Political landscape changed dramatically after the general elections in the middle of last year. The honeymoon period for the new Central government is over, and people want to see visible changes in their day to day life. The win by Aam Aadmi Party (AAP) in Delhi is probably an indication that man on the streets has losing patience over non delivery of promises by the new Government at the Centre. If this changing political scenario results in slower economic reforms, then that could disappoint the markets. Global risks in terms of excess liquidity, default by Greece, the long talked about collapse of the banking system in China, the increase in interest rates in the US, the lower oil prices and the political instability in the middle east are the other risks that cannot play out in 2015 and dent the equity returns expectation.

• How did you read the Inflation, GDP, IIP and Deficit numbers? What is your outlook on these parameters?

Inflation: The CPI inflation released under the new base and new weightages was below what was expected on the earlier series. Inflationary pressures continue to fall and thus barring some yoy base effects are expected to average around the 5.5% mark.

GDP: The new GDP series of value -added is a better representative of the economy; but given the lack of historical data of the new series; it is difficult to make sense of the 7.5% number; given that high frequency data suggest weakness.

Till I get a sense of what is a potential GDP growth under the new series, we will look at the incremental growth in the new GDP series. That suggests that GDP growth number is likely to increase by 50 bps this year over last year. That assessment is similar to ours as we expected the GDP in the old data series to average 5.7% in FY 15 and 6.3% in FY 16.

IIP: As we really don't look at IIP on a monthly basis as the data points tend to be very volatile. We expect mining series and Electricity production data to increase in the coming year which will keep IIP higher than last year.

Fiscal Deficit: After crossing the fiscal numbers for the year in November; we have seen a marked slowdown in government spending as the government tries to meet the 4.1% fiscal target. The coal India divestments would also bring much needed inflows into government coffers to help meet the deficit number. Amounts from the telecom spectrum are awaited; given that the earnest money deposit suggest a higher inflow to government than budgeted. For next year this could be in the range of 3.8%.

Current Account Deficit: With oil prices falling sharply; CAD for the FY 15 will be around 1.5% of GDP. For FY 16 also, CAD to likely to remain below 1.5% of GDP; a level which would be very easily fundable

• How do you see the Emerging vs. the Developed market debate panning out this year?

Debt levels across countries appear to be high - this is probably more worrying in the emerging market space as some of the debt has been funded through dollar loans. The continued strength of the US dollar could pose a challenge for some countries in servicing it. Developed markets face the issue of a slowdown and a deflationary situation. Many emerging markets in such a scenario cannot grow in isolation as exports from some of these countries have primarily been to developed countries. Any increase in US interest rates or the adoption of a normal monetary policy could impact equity prices in Emerging and developed markets

• What would be your advice to investors for the forthcoming year?

We have been telling that if the investor has Rs 100 to invest, then invest Rs 30 and take an SIP, keep the balance ready to invest latter when valuations look better. That opportunity could come when the market correct or some serious reforms take place. Both are possible. Market may not correct and some serious reforms take place in which case the investor could invest the balance Rs 70. In such situations the investor may lose the initial returns in the movement of stock price, but he will have a solid reason for investing, and generate long term returns.

• What are you expecting from the RBI from a yearly (2015) point of view?

I expect RBI to be focused on inflation targeting and bringing CPI inflation to 6% by January 2016. Inflation is expected to remain low due to lower support prices for cereals, sensitive items like onion and potatoes being bought under the essential commodity act. As per initial estimates, monsoon is expected to be normal. Manufacturing inflation is expected to be low due to global deflation and lower commodity prices. The current account deficit is also expected to be low at around 0.5- 1% of GDP, which can be easily funded by FDI and FII flows. I expect RBI to add another 30 billion to its reserves during the current financial year. Taking these factors into account, I expect RBI to cut interest rates by 50 basis points during the course of the current financial year.

• Where do you see the benchmark stock market indices and 10 year yields for benchmark government securities during 2015?

I expect the fiscal deficit to come at 3.6% of GDP. This would translate into borrowing program of Rs. 5.25 Lakh crores to Rs 5.5 Lakh crores. This supply would be easily absorbed due to lack of credit growth in the economy. Banks, insurance and provident funds are expected to be big buyers in the government security. We expect RBI to cut repo rates. by 50 basis points in the current financial year; accordingly we expect the ten year yield to trade in the range of 7.25 to 7.40 in the next financial year.

Disclaimer, Statutory Details & Risk Factors:

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