Everything would begin to slow now except for inflation: Maneesh Dangi
Last Updated: May 04, 2022, 06:01 PM IST
“I have been warning that it is a short business cycle. Do not think of it as another 2003 or 2008. It is a very short business expansion that we have experienced. The peak is behind us in terms of growth acceleration. We are decelerating fairly quickly and what we stare now is potentially a sort of analogue of 2011 in play. Everything would begin to slow and what will not slow is inflation.”
“We are staring at now for the next 6 to 12 months is substantial lowering of forecast of earnings and a rerun of the classic 8-10-12% kind of growth that Indian corporates have delivered over the last 8-10 years,” says Maneesh Dangi, Macro Expert
Would you say that RBI has been a little behind the curve in this move to carry out an emergency rate hike?
Yes, RBI has been behind the curve for a good 8-10 months. But the bar was low in a sense that all it had to do was to make less errors than the big daddy which is Fed and because the Fed had pivoted now to a rather hawkish setup and most probably are going to go in for 50 bps if not more rate hike this week, RBI had no choice. So, it was a setup that anyone long in the game would have actually anticipated and this is what happens when policymakers decides things. They delay it as long as they can but then eventually fold the trade.
You have been right in predicting the sequence of events which is that crude will go higher, then commodity prices will start hurting us, Reserve Bank of India and other central banks will rush to course correct that will lead to demand disruption, panic in the bond market and perhaps a selloff in the equity market. What is next in terms of sequence of events?
What is next is from the economic point of view, I have been warning that it is a short business cycle and bulls must be foregone. Do not think of it as another 2003, 2008 or something like that. It is a very short business expansion that we have experienced. The peak is behind us in terms of growth acceleration.
We are decelerating fairly quickly and what we stare now is potentially a sort of analogue of 2011 in play. I think everything would begin to slow and what will not slow is inflation. So, a very classic stagflationary set up is what I see ahead. I have to weave in other parts of the market such as equity.
We have argued about the term of trade adjustment that the large profit expansion that the firms had was at the cost of labour and small enterprises. That reversal is in play already. We are beginning to see it this quarter and what we are staring at now for the next 6 to 12 months is substantial lowering of forecast of earnings and a rerun of the classic 8-10-12% kind of growth that Indian corporates have delivered over the last 8-10 years. That is the big analogue.
For a comparison’s sake, I have written to you many times and openly also to many that it is a classic 2011 in play wherein what you should in terms of underwriting any risk be it of rates, credit or equity think of it as a very short business cycle not a longish one.
I know of late you have been a fan of actually buying farm houses but considering you are an equity as well as debt market watcher, with this kind of commentary and out of turn move from the RBI, we are seeing some crucial levels getting broken on the Nifty. What is in it for an equity market watcher because?
The joke in the west is that this time it is different. Every time I hear the joke that India is different, the truth is revealed that at a reasonable frequency, India is no different. So we are in a setup where interest rates are going to be lifted quite dramatically. Even markets as of right now are pricing near 300 bps incremental tightening in India.
So the terminal repo rate is going to get to somewhere between 7.25-7.30 and 7.60-7.70 and that is going to happen over the next two years. In that sort of a tightening cycle, we are also staring at a huge amount of borrowing from the government of the sort which has never happened in the past.
So the underlying discount factor is going to go. Six months ago, 10-year bond was at 6% and I sort of posted that it is going to be closer to 8% than 6% in about a year’s time and we are already there. So from an equity market point of view, people have to revisit not just the growth outlook which is pretty dim in my view but also the discount factor in India.
It is no more 6% as a base line, it is likely to be 8%. If 7.5% is the repo rate, we are going to get 10-year India treasury at 8% and we cannot sell equity in India at an expected yield of 10%. It has to go to 12% and that would mean that we will have to revise the estimates of Nifty and Sensex and midcap and small cap over next one or two years, notwithstanding that there are other forces at play.
The expected EPS growth of most indices are going to be like 10-12% lower than what you were anticipating three-four months ago which means that we will face a double whammy – one, that the discount yields are rising precisely when actually the earnings expectations are falling. That is the argument that I have had that we are going to get in this narrow lane, where we will have little space to exit.