The Hindu Business Line : ‘There are signs of an economic recovery’

Coimbatore, Sept. 14 Though the stock market has been on an upturn for the past few months, there are concerns as to whether the market buoyancy actually reflects economic recovery. The Chairman and Managing Director of Mumbai-based Angel Broking, Mr Dinesh Thakkar, believes that economic recovery is on. In an interview to Business Line, he shares his views on the reasons for his optimism.

You say that the domestic economic recovery is already under way. What is the tangible evidence you see in this regard?

Key indicators such as auto, steel and cement sales have been pointing towards an improvement in the overall economic condition. This is further corroborated by rise in the IIP (Index of Industrial Production) growth numbers, at 7 per cent in June 2009. We believe that there are signs of an economic recovery underway and expect the manufacturing and services to drive a 6 per cent plus growth in GDP for FY2010.

The market seems to be way ahead of the economic recovery. Is there any comparable evidence of this from earlier years?

A look at the history of the mature markets point towards the same, where markets have been ahead of the overall economic activity, discounting the trend much in advance. Thus, given that the economic activity is on an uptrend, with FY2011 GDP expected to be in the 7-8 per cent range, ahead of the 6-6.5 per cent GDP growth forecasted for FY2010, it’s not surprising that the markets have moved ahead discounting the same.

Is the rally being driven by liquidity rather than by fundamentals?

Emerging economies are at the forefront of growth and would be the key drivers for the global economy and hence key destinations for liquidity. While inadequate monsoon would impact the economic growth, it is unlikely to impact the corporate earnings. In the FY2003, while the GDP growth contracted due to shortfall in rains, the BSE-500 companies posted 16 per cent and 50 per cent growth in the net sale and profit respectively. Thus, with the economic recovery in place, the FY2011 India Inc performance is likely to accelerate.

One indication of the recovery could be the campus recruitment, which is yet to pick up in engineering/management institutions, and there is no indication of pay cuts being withdrawn. In such a scenario what makes you to be so optimistic?

What we have gone through as an aftermath of October 2008 (where we have witnessed a severe contraction in the economic activity), which has shaken the confidence across the board. Consequently, we expect a major pick-up in the campus recruitment and rise in salaries to take shape after the current up-tick in the economic activity maintains its momentum for couple of quarters. Thus, even though the economy has stabilised, the trend has not played out so far.

The mutual funds sat on a mountain of cash when the rally began. Will this influence the judgement of investors about investing in mutual funds?

Mutual Funds sitting on a huge pile of cash in uncertain market conditions is logical because cash is king in uncertain markets. However, you would notice that in tepid markets mutual funds have outperformed the Sensex. Diversified equity funds and tax planning funds have beaten the markets for the fourth month in a row. During August, out of 281 diversified equity funds, 273 funds outperformed the Sensex while 252 outperformed the Nifty. Given the historic track record of our fund managers’ performance, it should reinforce their confidence further.

Many sectors like realty are yet to participate in the market rally. Why? Do you see any clear winners in the next 9-12 months?

Going into next 9-12 months, one sector that would benefit on the back of economic recovery is banking. A lower credit to GDP of 6 per cent for India, which is significantly lower than its peers, augurs well for long-term growth of the sector. In near term, a higher credit offtake from the industries and the retail segment is expected in second half of FY2010 that would benefit the banking sector. Further, on the asset quality, the concerns on rise of NPAs have receded to large extent on back of expected revival in the economy. Thus we are positive on the banking space with a preference towards private banking companies, which have a better growth and profitability outlook.

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