Wednesday, January 16, 2019

Tushar Pradhan: Consumer discretionary can be as hot as FMCG

Friday, May 18, 2018, 8:56
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Thanks to rural electrification, new pockets of demand have come up. Consumer discretionary is full of promise as it looks to replicate the success of FMCG in 1980s. Tushar Pradhan CIO, HSBC Global AMC, spoke to ET Now.Edited excerpts: Who would have thought that crude will go from $50 to $80 including the Arabs or the Iranis or the Russians? Yes, oil is probably the most difficult commodity to predict and it keeps doing that all the time. What could be the implications and ramifications of this and are you a bit surprised that markets are still holding? With crude at $80 and bond yields at 3% plus with local bond yields raring to go higher, markets ideally should have corrected in a much more meaningful manner. I am happy but surprised too! There is a lot more to the story than just looking at oil and looking where the yields are to say that the equity markets are going to collapse or correct significantly downward. US oil inventories had reduced significantly all the way into December of 2017. From that point probably, the crude prices started going up. After that, production in the US ramped up significantly. US energy agency estimates show that they are looking at a substantial increase in oil production in the next two years and that is very significant in itself.One of the reasons why people are not taking too much from the price of oil as of now is because this is probably not more of a supply and demand play, it has more to do with the disruptions and uncertainty. The last time when crude price peaked at $100 and $120, China was buying up probably every commodity on the earth and was growing at breakneck speed in terms of GDP growth rate, The Chinese were the only consumer of all of these commodities for a long time. None of that really is in existence today. The GDP growth rate in the US is 3% and being a very large economy, we would not expect the GDP growth rate to substantially increase from here to anything more than 3.5% at best. As for the rest of the economies, the Japan economy actually shrank last quarter and China is not really showing a very significant upturn in terms of GDP growth numbers as well. One has to take a call that may be when oil prices go up, it is automatically bad news for equities or that yields would continue to go up. Whether it is the US yields or the Indian yields, they have their own stories. The other thing I would like to mention is that the last time there was a significant increase in US yields between 2003 and 2007, the US Fed actually increased rate by 25 bps every quarter. That also coincided with probably the biggest world market the US had seen over this time. As long as there is growth, higher commodity prices are not really an issue, nor are higher yields because you are getting compensated for them. The only issue is if growth does not come in and yields and commodity prices stay high, then that is where we need to worry about but that is something to be seen. There is good news coming in on the earnings front. While the banks may be a bit divided in their performance, the NBFCs are impressing the street with each passing quarter. What is your view? If you look at all the companies which have reported so far, there has been a beat on revenue as well as on net profits. If you take the narrow indexes, of course, there has been a beat but even if you take the broader indexes the beat on top line is something which is very heartening and that actually signals that we were expecting an economic upturn. Som pricing power may not have come back to the companies but clearly it shows some sort of volume increase and that is good news apart from just the earnings.The NBFCs are still a nascent area. There is a lot of market out there for these people to keep going at. These are not market shares being taken away from the banks because the banks were never in the lending space where the NBFCs are working. Today it is an open market in terms of trying to assess and access whatever demand that is there in that part of the market. Overall, the good news is domestically the economy seems to clearly showing signs of picking up. The third angle to this story is the domestic consumption theme playing out and I want to extend that out to what is happening with companies servicing the rural economy. The demand numbers there have only been picking up over the last six months. Is the tilt in consumption moving towards regional players?Thanks to GST, now there is really no distinction between any one sector, state or region within this country, it is a common market. If you find there is demand for certain appliances in a very rural part of the country or a regional part, I think it can be serviced out of anywhere at the moment given the GST regime. And that is a pretty big positive. Rural demand is in areas which was unheard of in the past and electrification of villages has brought them out. If you had demand for say a clothes washer or a drier or an electric appliance or an induction cooker, if you did not have any power there was really no need for that appliance to come to your house. But once there is power in far flung areas across the country, we are looking at a very different scenario in terms of what demand growth can look like in the coming years. Because of television, there is a lot of awareness in terms of these products and it is just a matter of time when this purchasing power in the rural areas which was principally targeted towards food consumption will start moving towards discretionary and that is where we see the possibility of sustained growth. What some of the FMCG companies achieved in the rural areas in the ‘80s, can perhaps be repeated in the consumer discretionary areas. Where are we headed in next 12 months? Everyone would be talking about first the state elections and then the big election in 2019. Reserve Bank of India may actually change their policy stance because crude has gone higher and interest rates are not likely to come down. Are we looking at very sizable trend changing moves? What are we pitted against?That is a very good question. We are looking at a certain set of assumptions that we made about where the economy was headed, largely driven by the fact that we had a fairly secure foreign exchange reserve, our currency was appreciating last year, the fiscal deficit was very much in control, the current account deficit thanks to the lower price of crude also was very much in control.We are seeing a significant move away from these givens in the economy and that indicates there is going to be an adjustment in terms of how we view the world. But as of now, we don’t know in which direction it is going to go because there are obviously many moving parts to the story and the biggest moving part is the oil price over which we have no control over. The oil products within the countries which are deregulated, allow a passthrough of the price rise to the customer. The government does not take the burden of subsidising these products as the prices move up.But there will be a threshold from which point the government will try to reduce the pressure on the citizens at large and start to take up some of the burden back to them and that can cause some strain on the fiscal deficit front and eventually on yields as well. But these are all scenarios which have not played out yet. In fact, if interest rates continue moving up like this and oil prices also continue to move up, this could just be a seasonal hike and if two, three months from now, the prices subside, then again we will have to change the narrative.It is very difficult to predict where we are headed, but clearly some adjustment needs to be done in view of the changed macro but it may not necessarily mean a very long and strategic change. It might just be a tactical change that needs to be done.

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