Income compression will lead to redemption of investment: Ajay Srivastava

Market liquidity is very low now, says the CEO of Dimensions Corporate Finance Services.

ETMarkets.com
In every rally when people find share prices to be acceptable and reach a positive level, they will sell and they will have to sell compulsively.
How are you feeling today after yesterday’s fall? What is your latest view?
It is a relief to see something green in the market. As we always predicted, it is going to start from the US and I hope this is a precursor of something good happening. But I am not sure whether this is going to last for long. If the government does not come up with a step that is required, this is not going to last very long. We will have some relief covering but this is not the end of the story because the fundamentals need to come back to order. It is a good day. It is a positive day but I think we need to still wait and see what the government is going to do about it because the dislocation has not gone away from yesterday till today.

Everyone is bringing down their index targets for the year end. Recovery is going to be extremely down the line. Would you still wait on the sidelines for some more time before thinking of nibbling, given that it seems to be a foregone conclusion that this is going to take a while?
Personally speaking, most calls are correct. If you really need to buy some shares and you are looking forward to buying it from a year to two years’ perspective, it is wise. Nothing much is going to happen to Nestle, Unilever, United Spirits or United Breweries, etc. Yes, they will have their own one-year cards. But as I said, a lot depends upon what the government policy is because the sooner they clarify, the sooner they can take a quick call. Now if there is some presumptive taxes on, let us say, liquor for instance. Now you have taken a call to buy the stock and then you gradually see a 20% GST increase on liquor or cigarettes or consumer luxury products. Your calls can just go wrong totally. So a great clarity as to how the path forward is going to be should be helpful in planning out.

It is not going to be all hunky-dory. I keep going back to demonetization. A lot of people thought that demonetization is going to be a short-term phenomenon. You saw what came out at the end. So yes, if you want to buy HDFC Bank, okay. We bought it yesterday; that is disclosure. But we are not recommending that anyone do anything like this. But these strong institutions would carry on for a longer period and if we did not have them in the portfolio, it is wise to have them in the portfolio and nobody can call the bottom. But I keep saying that that government policy could be highly disruptive in any of your portfolio selection choices and that is where you got to be very careful because most of us are sitting long on India. Let us also not get carried away because the liquidity in the market is very low today. The mutual fund offices are shut. So only online transactions are going on. The banks are by and large shut. So there is dislocation in terms of liquidity, which works both ways. The buyers cannot be there and the sellers are on the sidelines because mutual funds redemptions are not coming through at this point of time in any great numbers.


But I want to re-emphasize that there is so much of vacuum in what the government looks at. What the Fed has done yesterday, they took out the big guns. Literally, the big guns were out more than 2008. They did not wait for the parliament. They did not wait for the Senate Bill. They just came and said we are going to buy our commercial-backed securities. We are going to lend to small sectors. We are going to lend to business directly. They have never done it ever. So silence is deafening here. I guess we have to live by that.

Do you think now this market morphs into a market which you should sell on every rally? Are we going to go through that natural readjustment of the market?
I think so. And the reason is not because of the market fundamentals. There is going to be a major realignment in people’s portfolios, requirement of cash and flight to safety. All the three things will happen together. And because the cash is going to run out of the system very fast in most households, therefore the limited amount of money they have invested, they will bring it back and start spending on EMIs or start spending on this thing. So the selling perhaps in every rally will start not because they have no faith in the market but because it will be necessitated buy; the cash requirement of most of the system. That is one. Secondly, there will be huge withdrawals from PMS as soon as lock-in starts to finish up because PMS really has been in bad shape. Lot of people are going to get out of PMS.

So domestically, there has been no selling. Let us be honest about it. There will be no selling at all and therefore to that extent, one should prepare for the fact that in every rally when people find share prices to be acceptable and reach a positive level, they will sell and they will have to sell compulsively because we have never seen an income compression of the kind we are going to see in the next 30 to 90 days, leaving no choice of people but to redeem the mutual fund to meet their expenses. So that is going to be a large component of what the sell out is going to come through.
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The US government said last night that they will continue to stimulate the economy as long as it is warranted. Yet markets were not excited. What is going on? If this kind of an attempt by the US government is not exciting anybody then I wonder what is ahead for us. That kind of a move is unprecedented where the government is saying we are standing for you and have your back but yet Dow closes in red?
Yes, Dow closed in the red. NASDAQ luckily broke even or a little bit in the green but the point is, in an environment like this, who would invest? I does not matter who the person is; from a corporate head to an ordinary person. Would you take the money out of your bank and put it in a mutual fund or put it in the equities today not knowing how long your income streams can be constrained and how long you may have a job? So how can they start planning to put money in equities when they need the cash to survive and a large block of people in America; you know how Americans are leveraged by and large, and the small businesses are the big engine there. Now if they do not know how they are going to pay the salaries, how do you think they are going to invest in equities?

Now the other counter question is that if the Fed did not come out with such a bazooka, what would be the state of the market at that point of time? What would be the state of the people, the industry? I have been working harder than I have ever worked in my life taking calls from people, the companies we advise; everybody is worried that next month where are they going to pay the power bill, the salary bills, bank drawdown lines. Working capital lines are going to get constrained because you have not sold enough and therefore your limit availability will go down when you file in the statement for withdrawal power next month.

So the worry down the line is where are you going to meet the liabilities from? Now when you are not sure how you are going to meet the liabilities, scarcely you are going to buy stocks. It does not matter what the price of the stock is. You have got to pay your bills first before you enter stocks. So the US is also going through the same paradigm.

Two, everybody needs to hold cash and that is true for India as well. Yes, you will have short coverings, long coverings; 5% up and 10% down but the fact remains that 90% of India will need to hoard cash. But look at corporate India. The corporate India got Rs 1.5 lakh crore benefit out of the government. Look what they have committed to coronavirus benefit; a large industrial house spent more than that on a party at the house and that is the kind of commitment. Nobody has walked out and we had the largest bank’s chairman coming and saying we need forbearance and the government needs to do something. The bank got a Rs 2,000 crore benefit. It did not come and say listen, take the benefit back from me, put a coronavirus cess on the largest of taxpayers. We can afford it. Give it back to the lower strata. I think this is going to change the social fabric because the way the corporate India has reacted is really shocking. They are saying you know what, we need more. And that is my fear that the new benefits will again go back to the same old guys leaving the bottom of the economy where it is. America came into the crisis from a historic growth high. We are entering the crisis from a historic growth low and that is the distinction we must keep when we look at America and India.
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Look at what is happening to the currency. Would you at all venture into buying any of the IT names at a time when you have got the rupee starting at levels of 76 right now?
At this point of time, I am running short positions in software stocks. I think they are profitable at this point of time. You are right; currency is there but currency benefit will not come immediately and the reason I say this is that most of the companies do forward cover of currencies. So whatever benefit they are getting will get it over a period of two years time because for this year, the covers are already done. And this year’s covers must have been done in the region of Rs 74 to 76; so 76 plus premium 79 is going to go into the next year.

Number two, the demand side is going to have a major problem because I do not think new contracts are going to come in very easily at this point of time. Everybody is going to be selective in terms of looking at the companies; so the ability to give new contracts is going to be very limited apart from the dislocation that is already taking place. The third point is, in a scenario where exchange goes up like this, most customers of the new contracts come and renegotiate the rates and say they adjust the rate back to the currency or at least partly to the currency. So I am not sure whether 76 plus will translate to the bottom line for the next year. Demand is going to be constrained severely and the future contracts may get negotiated on the basis of 76-78 and if the dollars traverse back, their margins could be hurt. All in all, I think it is a short at this point of time. We are running short positions on software stocks. Time will tell whether we were right or wrong.
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