Last weekend I had an opportunity to address a gathering of
stock market intermediaries. The interface provided some useful insights which
I find pertinent to share with the readers.
All the participants deal with small and medium sized household
investors and traders, commonly referred to as the Retail Investors. The common
refrain was that the recent stock market rally has not benefitted the retail
investors. Most of these investors are stuck with the struggling mid and small
cap momentum stocks which are down anywhere between 25%-75% from their cost of
acquisition and no hope of recovery.
To make the matter worst, many of their active clients are still
looking to buy the fallen angels, the stocks where the equity value is
negligible or even negative in some cases. Most popular stocks with this
segment are stock of JPA group, ADAG Group, Jet Air, DHFL etc.
Tata Motors, SAIL, Nalco, Coal India and Yes Bank are some of
the stocks which have perhaps disappointed the largest number of retail
investors.
The investors' sentiment has improved marginally post the restructuring
of corporate tax rates announced by the government. However, most of them
remain skeptic about the sustainability of the current up move. There appears
to be a widespread expectation that the budget for FY21 will contain provisions
for restructuring of the personal income tax rates also.
The feedback about the business sentiments was scanty.
Nonetheless, there appears to be some improvement in business sentiments. Most
of the people would however like to wait for supplementary announcements like rate
cuts, easier credit terms and government spending etc.
The two key concerns of the participants were:
1. Will the promoter be encouraged by new tax
provisions and set up new units as private entities, rather than investing in
the growth of the existing listed entities?
2. How the government will manage the fiscal
deficit post the rate cuts, especially when the GST shortfall is also going to
be much higher than anticipated? Will higher deficit constrain RBI in cutting
the rates further? and Will the government investment in infrastructure be
pushed back by couple of years due to revenue shortfall?
My take on these concerns is as follows:
Fresh capex
In my view, the first concern may not be valid for the
businesses owned by Indian promoters and/or investors. For, many of the Indian
businesses (e.g., in cement, power, chemicaal, steel, auto sectors) have either
done material capex in recent past or are running at poor capacity utilization
and do not need to do invest in fresh capacity in near term.
Insofar as the foreign companies are concerned, many of them
like Maruti, Bosch, Siemens, Cummins, and Schneider etc have been investing
outside the listed entity for past many years. This trend may continue or even
accelerate. The consumer MNCs like Colgate, HUL etc do not need to do much
capex in near future at least.
Fiscal deficit
The relationship between the investors and the fiscal deficit is
akin to the proverbial Mother in Law and Daughter in Law relationship. No
matter what, the investors can never be fully satisfied with the fiscal
conditions.
We have seen much worse fiscal conditions in past 3 decades. The
point that is often ignored in comparison with global economies is that so far
the fiscal deficit in India is still funded by the savers, mostly from middle
and lower middle class. In fact, in past 4years the reliance in small savings
to fund the fiscal deficit has risen considerably.
Historically, the governments have been managing the fiscal
burden through maintaining the interest rates on savings in negative territory
(deposit rates being equal to or lower than consumer inflation). In recent
times the real rates have become hugely positive and there is lot of leverage
there to cut rates and fund the fiscal deficit easily with no critical impact on
the overall fiscal conditions.
Moreover, we are likely to see an aggressive disinvestment
program in next 12-18months that shall compensate for some of the revenue
shortfall. 5G auction in FY21 should also be supportive. However, if the rates
are not cut meaningfully (or inflation does not rise meaningfully) in next
couple of years, FY22 onwards we may see pressure on the fiscal conditions.
The key monitorable here is the private savings rate that has
been declining consistently in past one decade despite very high real rates in
recent years. If tax cuts can result in higher corporate savings, it would be
good sign for the economy.
Remember the gamble the government has taken is that private
investment will accelerate to compensate for the poor growth in public
investment. If this bet fails in next 2-3years, we shall have a serious problem
at our hand.
