The Economic Times daily newspaper is available online now.

    We should be back to 0% GDP growth YoY in Q4: Neelkanth Mishra

    Synopsis

    'We moved from 50% to 90% of normalcy in about three-and-a-half, four months. But the 90% to 100% move will happen over the next six to seven months.'

    Neelkanth Mishra.03 (1)-1200ETMarkets.com
    We need more RBI intervention and more creative ways for creating demand for the 10-year bonds, says Co-Head of Equity Strategy, Asia Pacific and Equity Strategist, India, Credit Suisse.

    What is your take on the economy? How do you think we have emerged at the macro level, at the economy level, at the consumption level?
    The economy is doing better. Unfortunately, the virus, at least in terms of the number of infections, is doing even better. The number of infections keeps going up but the economic trajectory has changed. Starting from here, it is important to remember that going forward the economy is going to improve gradually. In the lockdown, we may have fallen to 50% of normal but then we have bounced back. In our estimate, we are at about 90% of normal right now. About 7% of GDP worth of consumption, about 2% of GDP worth of investment is still restricted either by regulation or by fear and then there is some demand overlay.

    So about 10% of GDP is still not fully back on. We moved from 50% to 90% in about three-and-a-half, four months. But we think that the 90% to 100% move will happen over the next six to seven months and therefore the pace of normalisation is going to slow down. We are seeing some disappointment among people as the sharp recovery tapers off. At this stage, it has to because there are quite a bit of restrictions still there.

    Unlock Leadership Excellence with a Range of CXO Courses

    Offering CollegeCourseWebsite
    Indian School of BusinessISB Chief Digital OfficerVisit
    IIM LucknowIIML Chief Operations Officer ProgrammeVisit
    IIM LucknowIIML Chief Executive Officer ProgrammeVisit

    The local governments are still imposing lockdowns. There are things like quarantine requirements for travellers which now seem a bit odd because now almost every district in India has more than 1,000 cases. So from an opening up perspective, as local governments and state governments realise the futility of these weekend lockdowns and the random lockdowns and the restrictions on travellers, the regulatory constraint on the economy will slowly get lifted as the fatality rate keeps going down,

    "Before the virus, we were still growing 5-6% lower than what we should but we were still growing. So despite that upward surge or upward tailwinds which regularly help the economy, we should be back to about 0% in the fourth quarter."

    — Neelkantha Mishra


    I think we are still seeing too many deaths -- 1,000-1,100. But the only good thing is that that number has not risen meaning that if we were still at the 3% to 4% fatality rate and the incremental case fatality rate continues to fall. What is even more important for us to know is that all these zero prevalence studies are showing that the number of infections is actually far higher than the number of cases we are able to track.

    If you were to use a simple ratio, it is not theoretically accurate, but it is the best data we have, the infection fatality rates are more in the order of 0.5% to 0.1%. As this becomes more widespread and the prevalence of the disease in the rural areas is still less than 5% but in the next three-four months, it will continue to rise. As most places get to that 40-50-55% zero prevalence, the curve tapers off. Hopefully the virus keeps becoming weaker over time and by the fourth quarter, we should be at about 0% GDP growth year on year. That will be helped by the structural factors.

    Before the virus, we were still growing 5-6% lower than what we should but we were still growing. So despite that upward surge or upward tailwinds which regularly help the economy, we should be back to about 0% in the fourth quarter.

    Eight out of ten consumer or auto companies or for that matter even most of the construction companies are saying that they are almost back to 80% to 85% of pre-Covid business. Should we take that with a pinch of salt?
    No we should not. When we say we are at 90% of normal, that is an aggregate. In some cases we are at 98% of normal, in some cases may be 102% of normal. So the important thing to see here is that even now, diesel demand in India is down 22% year on year and why is that? Because kids are not going to school, school transport or transport to education institutions is a Rs 1,20,000-crore market. We have 33 crore students going to colleges and schools so that is 0.6% of GDP. You have the intercity, interstate transport which is still curtailed mostly and that is a Rs 4.5-5 lakh crore market. There are large parts of the economy like hotels, restaurants which are closed. We may lose out on 1-1.5 crore tourists and if they stay for like 10-15 days on an average, they consume a certain amount of food. 18% milk consumption is out of home. The festivities this year have been far lower than normal and so demand for milk products is much weaker. Therefore, there are some segments which are down 80%, 70%, 60% and there are some segments which will be at a higher level.

    In autos in particular, we have to remember that last year personal vehicles (PVs) saw a 20% decline and it was one sector which saw intense destocking. So post the IL&FS debacle in September 2018, as the NBFCs withdrew, there was a problem of financing for the channel, wholesalers and retailers and there was intense destocking, exaggerated by the transition from BS-IV to BS-VI. By March-April, the restocking was expected to happen.

    So, if the restocking is happening now, you will see elevated activity levels because that whiplash, that supply chain bull at some point has to hit on the upside and that is why the supply chains for automakers are actually quite robust.

    For construction, 80-85% normalcy is to be expected. One hopes that with some more restrictions being lifted, they can get to 100% very quickly because that is one area where with some discipline, we should be able to get the activities to normalise as quickly as possible.

    How should one look at what is happening in the banking sector especially after the RBI new norms on restructuring? What should investors do? How does one calculate book value and other ratios?
    This is one of the reasons when you are doing a really hardcore value-based analysis, you have to look at trailing 12 months’ book value and how stocks and sectors are doing on that.

    The market is more or less back to where it was on the trailing book. It may be 4% lower but is more or less there. The banks are still 30% lower and one of the most important factors you mentioned is if you put a moratorium and then you have some element of restructuring, its contours will be available to investors with a lag.

    Hopefully some banks will be much more prompt in disclosing with transparency that the price to book multiple has to go down. The lack of clarity is a very important factor. The other elements, which can potentially drive down the stock, like lower growth, the fact that corporates may not be borrowing as much, that as the economic nominal GDP growth slows down, the demand for loans will be much weaker and all of those factors will apply as much to the other stocks in the market than just to the banks.

    The interesting thing is, is the market going overboard with de-risking? If you do a very simple high level analysis and I know there are more rigorous ways of doing it, but from a big picture perspective if that change in the trailing price to book for the private banks and PSU banks was the same as that for the market, which means that just 4% lower or almost the same the book value-- but right now it is not, which means that the market is assuming a certain erosion in book value.

    So the market does not trust the book. As that erosion of book value is quantified, you will see that there is almost Rs 3 lakh crore erosion in book value that the market seems to be pricing in. This is very simplistic. You should be doing it on implied ROE, on what the returns have been and what should be. Bank by bank, this could be very different. But on this ballpark number, if it is not Rs 3 lakh crore, it could be Rs 2.5 lakh crore total loss.

    When we look beyond the pandemic and assume that we see a 10% decline in GDP this year, we think that about 10% of that will go to the corporates. About 50% of that loss would be borne by the government via lower taxes, some amount of fiscal spending and about 25% of that will be wage earners, about 15% the informal firms and 10% the corporate firms. That 10% is about Rs 2 lakh crore.

    If all of the corporates’ total loss is going to be Rs 2 lakh crore, it is unlikely that the banking system book value erosion will be Rs 3 lakh crore because there will be NPAs, there will be write-offs, there will be tax credits etc. So, in our view, there is a clear opportunity in the corporate lenders.

    I would not say the same about retail lenders because there is a lot of erosion for wages, there is a lot of erosion in the balance sheets and the earnings potential of informal firms and all of that will show up in the retail lenders. So we are still cautious there. The lack of transparency is not going away in a hurry but when you see this gross level of mispricing, maybe there is an opportunity in corporate banks.

    Why are yields going at 6%? We have got inflation which is transient, we have got liquidity; RBI is committed to stick to OMOs, LTROs and yet the bond yield spiked to 6% not once, but twice?
    That has been a problem for the last at least two years if not more when we brought down the SLR levels for the banks. All the banks now have excess SLR. This is what we would call the market risks that they have taken and if you periodically allow, because the messaging that came out of the last MPC minutes scared the market into believing that the RBI expected and desired higher yields. Their actions thereafter have indicated that they did not. In fact, the governor has been saying that he thinks lower yields are important for better rate transmission.

    But that was the way the RBI minutes were interpreted by the market because it had taken on a reasonable amount of risk and they just panicked and therefore the yields went back. Then the RBI took measures and brought them down. So unless we see some stability in the demand for bonds, my prescription would be for the yields to be a lot lower than they are right now. But given the dynamics of the bond market, my expectation is that they may stay here or maybe drift lower. A very sharp decline is unlikely unless the RBI gives direct signals into the bond market.

    The repo rate is at 4% and in this environment where the economy is still 10% below normal, we need to see negative real rates and I would not worry too much. We can discuss inflation as well and why the current inflation numbers are not analytically useful. But given that currently we should be thinking about negative real rates, I see no reason why the government yield should be so high. Perhaps need more intervention and find more creative ways for creating demand for the 10-year bonds.



    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more


    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
    The Economic Times

    Stories you might be interested in