“Trump wants a weaker dollar, but the markets might not deliver that to him given all the trends that are going into a dollar strength. In fact, we are looking at parity with the euro coming for the dollar within next year,” says Ajay Bagga, Market Expert.
What could influence the script of how markets would move now for next quarter or so? Will it be Fed? Will it be Donald Trump? Will it be earnings? Will it be budget?
Ajay Bagga: If I could get an option from you for old time’s sake, to say all of the above, but the biggest factor globally will be the Trump presidency. Now, is a lot of it already baked in? That is the big question. Has the market priced in? Because Trump, at the end, is a pragmatist. He is an opportunist. It is not necessary that the stated policies will actually come through. Most of the statements are a negotiating gambit. So, you throw down your cards and you wait for the opponent to show their cards and then he makes a different play after that. So, it is a wait and watch. Markets have priced in one level of Trump moves post Jan 20th but let us see what actually comes, that could surprise, so that is one. As far as the Fed goes, a rate cut tomorrow and then a pause probably.
Trump wants a weaker dollar, but the markets might not deliver that to him given all the trends that are going into a dollar strength. In fact, we are looking at parity with the euro coming for the dollar within next year. It has already gone from 1.1 to 1.05 and you could probably see a 1 is to 1. So, a stronger dollar, which Trump would not like, but you are not getting a Plaza Accord, what Reagan was able to do and which really brought down the Japanese economies.
If you look at the Communist Party meetings in China, they keep saying that we are not the Japanese, we will not do a Plaza Accord and they have been depreciating their currency. So, second would be the Fed. Then, coming to us domestically, it is going to be one more challenging earnings quarter, both the GDP as well as the management guidances that are coming out not looking too good. So, we are going to see underwhelming earnings once more for this quarter, which will start coming in by the second week.
And fourth, then the budget. Budget becomes important because this has been a year which has again, sorry to use the same word again, but underwhelming year economically because the counter cyclical moves that were expected both on the fiscal and monetary side did not happen.
RBI tried to defend the rupee using a $50 billion of FX reserves when all the other currencies were depreciating against the dollar much more strongly and that has come through in the November merchandise trade gap of 37 billion, so that has been a difficult exercise by the RBI. Secondly, it took out liquidity from the money markets, which becomes a restrictive monetary policy then and on top of that, you did not cut rates. So, there was no counter cyclical move on the monetary side. On the fiscal side, we did not spend.
So, four months gone in national elections. Then a very big state like Maharashtra, a very prolonged election, which was postponed a lot and when 14-15% of your GDP comes from one region and you are not spending there, that has an impact. So, we have had underspending by the government which has caused all these second order effects of lower aggregate demand, lower consumption and also infrastructure spend not keeping up.
So, now we will be in a catch-up mode. These three months were expected to deliver something better. The second half was expected to be better. October did well, but November again did not perform that well and let us see what the December numbers show. But the next three months will be critical for government expenditure to at least catch up near and that 11 lakh crore infrastructure spend will not happen now.
Like last year, 50,000 crores was left over. Let us see how much gets left over for this year and that has an impact on the economic momentum.
And to the point that you were making on infrastructure and the capex spend, do you think if there is a pickup in the last quarter, some of these infrastructure companies might get to benefit as well?
Ajay Bagga: Definitely. I think out of the four pillars really drawing up the economy, the private consumption is not growing as fast as we would like to. Rural consumption is at about 5%, urban is at about 4.5% year on year, so not up to the mark.
Your private capex is okay, but not that great again. Exports are not doing well, as yesterday’s numbers on the November merchandise export showed. Service exports are doing well, but merchandise exports are suffering and that leaves the fourth pillar, the government capex and high hopes from there that this will come through and there will be expenditure from the government and at least some big projects being announced, be it in railways, be it in defence, be it on the infrastructure side, construction side, so that is one lever that is available for the government. Apart from giving some GST breather and trying to boost the consumption economy or on Feb 1st giving some tax rebates, this misnomer that a 15 lakh per annum person is rich in India that sits at the heart of this consumption issue.
Overall, there is a 70-80% huge segment, which is very mass as such. But you get slightly affluent. If you can put more money into those pockets, you get a kicker for the economy immediately. It is like every rupee that you spend in infra gets you four-five times of rupees in the GDP in a growing economy like India, same way on consumption if you give the affluent class some more money in their pocket, you see that kicker. If you give it as a dole out, that gets saved or that goes into paying off outstanding loan or something else. It does not come back immediately into the consumption.
So, I hope some smart moves are made in the budget and some tax relief is given, that is much needed to take the economy back into that 7.5-8% real growth trajectory. And along with that, of course, the infra, but I think at 11 lakh crores we have reached our capacity to spend. I do not think in the present setup we can spend more than that. So, probably we will have to keep that same number which could be a disappointment on 1st February.
As far as the real estate pack is concerned, there seems to be a bit of a dichotomy. If you ask people, they do not want to buy real estate and they say that the prices are not good enough to sell it. But if you are talking to a developer, they are very happy with the kind of sales they are witnessing. What is your take?
Ajay Bagga: What you see especially on the premium segments, multiple hundreds of crores of sales happen on opening day, it takes a lot of work by the brokers in the background and they collect token checks and then there is a big announcement made that the entire project got sold out. So, it is a good amount of marketing happening. But on the ground, what we have seen, it has been a great year. Again, nearly 5.7 lakh crore houses getting registered this year. So, real estate has had a great year. The sector has done very well. It is one of the top performing sectors for the year. As the rates come down next year, hopefully RBI starts a rate cutting cycle by February, the sector should benefit.
Again, the clean out has happened in the sector. So, from some 27,000 mom and pop developers all across the country, we are boiled down to a few hundred and out of which we get a few which are listed, good clean balance sheets, these are the survivors who are really now picking off most of the juicy fruit.
So, it is a good sector to be in and still at about year three of a 10-13-year cycle that you normally see in real estate.
Valuations always remains an issue, but it is a game of being able to get those customers and there thanks to the housing finance companies availability of finance, it has become more of an EMI game.
