Updated: May 24, 2021 8:52:50 am
Even as the pandemic continues to hurt lives and economy the stock markets have been rising. Ajit Menon, CEO, PGIM India Mutual Fund told Sandeep Singh that markets are rising on variety of factors including strong earnings, ongoing vaccinations, fresh approvals and growth in global economy. Stating that the pandemic has had a disproportionate impact on lower income people and has pushed people back into poverty, he said that we will have to take coordinated steps to ensure that our economy has the foundational strength to move forward. Excerpts:
How do you see the impact of the pandemic ?
I am more concerned about the fact that we are almost forgetting about a large part of vulnerable sections of society who don’t have the means and have been impacted badly. Wealth has got concentrated and lower income people have been impact much more.
History tells that globalisation over the last couple of decades brought more people out of poverty. However, this pandemic has had a disproportionate impact on lower income people and has pushed people back into poverty. Decades of work has been undone in a single year. So some coordinated steps will have to be taken to ensure that our economy has the foundational strength to move forward.
What do you think should be done?
One is to protect the income of most vulnerable sections of the society and I personally hope that the government does not reduce the rates on small savings. Out of Rs150 trillion in bank deposits, small saving is only around Rs 10 trillion and senior citizens would be just Rs 1 trillion and I hope we take one important step to subsidise that small section of society.
We have to bring people back, give them jobs by taking advantage of the shifting supply chains. The government is taking steps in that regard and giving incentive to sectors will have to be accelerated so that we don’t let people fall in the gaps.
Third aspect I would say is children. Many in the rural areas would have fallen off the educational grid as everything moved online and we have to see how to protect that.
The fourth area is women whose participation in work force creates multiplier effect in the economy. In India we did not have a great ratio to start with and in the pandemic it would have suffered.
Do you think the market is delinked from the realities of the economy. What is driving it?
The markets are always a slave to earnings and growth visibility. Historically, Sensex has given annualised return of 16% over the last 40 years and the nominal GDP growth has been 14%. Sensex and nominal GDP have had similar growth rates over past 20 and 10 year periods. But if you look at last three months, the market is down by 3% and that is not enough for what we have seen as an impact of second wave.
Market is clearly having the visibility that vaccines are available and government is giving approval to more vaccines. While vaccination drive has been slow, there is a sense that more approvals will accelerate it.
While 80% companies by weightage of Nifty 50 have reported their Q4 earnings, their y-o-y profit growth has been 54% and people are reacting to that. You also can’t divorce the reality of what liquidity availability does to markets and globally, the liquidity has been very strong.
While we could not anticipate the second wave properly but with the learnings, we are probably better prepared for the third wave. The global markets are doing better than India and have navigated the second wave and markets like US and Europe are open and doing business. While in the short term you can see a disconnect, market is not disconnected from economy in the long term.
Everyone knows that this quarter results would be bad and rating agencies have already reduced their GDP growth projection by around 2 percentage points to 9-10%. Earnings growth projection for Nifty may also get revised from around 35% to 25-30%. However, a nominal GDP growth of 9-10% and earnings growth of 25-30% is still excellent and markets are reacting to that aspect.
Do you think big listed companies have been growing at the cost of smaller MSMEs which are big employers and how do you see its impact on the economy ?
Yes, the bigger institutions and corporates have benefitted disproportionately. However, that has been a trend pre-covid and has got accelerated during pandemic as larger entities are much more in control of their capital and resources to accelerate their business.
This will definitely have an impact on a country like India which has a large working population that has to be gainfully employed for a demand led growth in the economy.
History shows that when these big economic shocks happen around the world, in the next 5-10 years there is a lot of innovation to business model and processes. New sectors, new industries and new jobs get created. While you see concentration of business towards few companies, there is going to be a lot of peripheral activity and innovation that will create job opportunities.
While the number if SIPs have been rising, why is the net inflow negative?
While HNI investors, who are big part of the industry, have been booking profits and looking at alternative investment opportunities, some redemptions have actually gone into direct stock purchases as there have been rise in demat accounts and people have been looking to accelerate wealth creation. Another factor that contributed to the net negative inflows is withdrawal by people, who got impacted by pandemic, to run their life.
I think the investor movement to direct investment is a short term reaction to the current context. A lot of people are working from home and they have some time to think and revisit their investments. We must also realise that this is a whole new generation of people who not only have the ability but also the convenience of digital platform.
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