Monetary Policy: Vetri Subramaniam: Time to look at central banks’ actions

“There’s no doubt it’s performed well over the last three or four years, but I would say that’s perhaps partly due to value trading as well, although from my perspective I’d rather look at it on an equity basis at the moment,” he says. Vetri SubramaniamDirector of IT Systems, ITU AMC.

I would like to draw your attention to what is happening in the public sector companies sector and although this is the most interesting sector at the moment, it has already started to see a correction in terms of price and timing. I am referring to the higher value companies, defence, railways and shipyards. Has the leadership in some of these cyclicals and public sector companies come to an end or is it just a correction in terms of timing which will eventually adjust?
Vetri Subramaniam: So, that is a very difficult question to answer. I mean, this question has never been asked about, say, Tata Group companies or Birla Group companies or Reliance Group companies and I think it is a big challenge when you look at the Nifty PSE. There is no doubt that it has performed well in the last three-four years but I would say that maybe it is also due to value play but from my point of view, I would rather look at it on a stock basis at the moment.

There are some state-owned enterprises that are dominant, that are leaders, that are best in class in the industries in which they operate, but there are many that are not and I don’t think those are the types of businesses we want to be exposed to.

So I would really recommend that you be much more specific about the stocks, just as you would be when it comes to Tata Group, Reliance or Birla Group. Another factor that is moving now is interest rates. For the first time since COVID, globally interest rates Interest rates are going to come down. We know that interest rates are the linchpin that can act and that can really change the way valuations and demand would move. So are markets pricing in a fall in rates, both locally and globally, or is it something that could surprise us?
Vetri Subramaniam: I actually have a feeling that if it surprises, stock markets There may be more reasons to worry. The fact is that the US economy is still doing pretty well, with 3% growth in the June quarter. Yes, there are signs of a slowdown, but I think the most important thing to keep in mind, in my opinion, is that monetary policy In the United States and perhaps also in Europe, we will not return to the situation we had between 2008 and 2020, or perhaps 2021, when monetary policy rates were set at zero and the challenge was how to achieve inflation.

I think we are returning to a more normal monetary policy and therefore we cannot expect interest rates to swing as wildly as we have seen in the past. So I think this is a very normal monetary cycle.
Maybe the US will cut 100 or 150 basis points over a 12-18 month period, but the yield curve will be upward sloping. And remember, inflation is still above their 2% target, so that will somewhat limit their ability to manage. So at this point, I don’t think interest rates in that sense A) are going to see very drastic cuts, even in India, there are unlikely to be any big cuts and so it’s not really going to be a source of much support for equity markets.

And remember, stock markets, which have already become expensive, are waiting for interest rates to give them an additional boost, which is a big challenge. That said, we know that emerging markets, in general, tend to see much more capital flows They go in and out, depending on the path of interest rates, so there could be flows into emerging markets, but India’s premium to emerging markets is very high. So, I’m not sure we’ll be a big beneficiary of that, but it will certainly be a supportive trend.

In all this rotation that is going on in the markets, money is moving or at least the public sector package is stagnating a bit and you are seeing the bottom-up stories actually coming to the fore in IT, FMCG, pharma. You also talked about your thoughts on banks. But it seems like, and I’m going to pick it up purely, Consumer goods Here, given the hopes for rural recovery, does this seem like a sustainable measure?
Vetri Subramaniam: It’s hard to say right off the bat. I mean, it’s not a sign that it’s going to be sustainable or not. But the other way to look at it is that the valuations of all the sectors that used to trade at a big discount to the index have gone up very, very significantly.

In my view, what is happening to some extent in both FMCG and IT is that these sectors, which typically had a very high premium to the benchmark, have significantly eroded that premium. And in fact, you have seen a lot more, I would say, cyclical companies that have tended over time to be cyclical, not just in terms of growth, but also in terms of their ROE, which have actually increased very dramatically in terms of valuation.

So, I think it’s kind of a valuation normalisation operation whereby if you’re going to start paying FMCG multiples to capital goods stocks, then why not just look at FMCG stocks where they may be rich, but they’re much more stable in terms of medium-term results?

I would also like to include elements such as where global downside risk is moving and what is happening with the bond market. Why are we seeing what you might call a very synchronized bull market? Gold Gold is going up, Bitcoin is going up, bonds are going up, housewives are saying they are so happy because gold is going up. We are going through that phase where no matter what asset class you’ve invested in, you’ve generally done reasonably well over the last 12 to 18 months. Historically, not everything goes up in sync, but right now it does. I mean, bonds, stocks, and gold are all going up together. I mean, I’m trying to figure out the puzzle.
Vetri Subramaniam: Well, actually, bonds have not performed that well, except in the most recent period. They have not actually been very profitable. They have been very profitable for those who are willing to invest in them, but the performance over the holding period over the last two or three years has not been very good, particularly in a global context because of the very sharp rise in rates. I think that, as far as gold is concerned, in my opinion, the reasons are rather structural.

Following the events of the conflict between Russia and Ukraine, and as people have seen the risks of holding significant dollar reserves, many central banks are leaning towards increasing their gold holdings.

So I think gold is under some sort of structural support coming from central banks thinking about the risks they are taking from a geopolitical standpoint and how to better manage their sovereign assets, so I think that’s a structural factor that’s supporting gold. I’m not sure it’s related to the fact that stocks have been getting a lot of support.

I would also point out that if you look at Europe, it has performed well, but the second largest economy in the world, which is China, is in a pretty bad situation, both in terms of its economy and its stock market. So it is not as synchronized a pick-up in growth as perhaps it was in 2021 and 2022. So I think the world is on quite divergent paths at the moment.