Vinod Karki: All high-frequency indicators for domestic economy seem to be quite robust: Vinod Karki
The fear of unknown eliminating from the global markets could force a type 1 error in gauging domestic economic activity. Now, it is too technical. So, let us understand your market thoughts right now.
Actually the technical term, it makes it look as if it is some complicated thing. The basic thing is the global uncertainty of something could happen beyond what has happened. So, we had some of the bank failures in the US and then in Europe. So, you race back in time, you suddenly start thinking what happened in the past when bank failures happened. So, suddenly open some Pandora’s box, anything could happen kind of a thing because we have seen a global financial crisis. But the contexts are different this time around in the sense that we are at the peak of the leveraging cycle at that point in time.And these banks had piled up on toxic assets and that fell apart and everyone was impacted. But this time, if you look at it, what is happening is the larger banks are actually getting stronger. They are seeing a massive shift in deposits from those weaker banks to the larger banks. So, the big banks which actually matter for the markets are actually getting stronger basically.
And we are not in a stage where we are in an overheated economy, as it was in the past and banks are not holding toxic assets. So, I think it is a little different but the fear is there of something might happen like it happened last time. And that is actually so overwhelming that you could be forced to ignore the positive high frequency data that is coming month by month.
So, if you look at for March, GST is 1.6 trillion, no one is even talking about it. And that is not the March effect because that will show up in April. It comes with a lag. And if you look at both the PMI for manufacturing and services, it is pretty robust. I mean, it is one of the best globally if you see the PMI global charts. I mean, we are outperforming significantly. And credit growth at 16% is doing quite well. So overall power demand and other things we are seeing, steel, cement, domestic market, they are looking pretty robust. And the real estate cycle, that is one of the best in several years that we are seeing.
So I think the overhang of something terrible might happen globally which will impact domestic demand very badly is playing on the mind. It could be right, but we do not know, basically but the point is we could completely ignore what is happening positively in the domestic economy. So that is the type-1 error, that you completely reject some facts which are coming because you have some assumptions about something else.
Do you think we now need to brace ourselves for more slowdown, more earnings cut because if banks are lending less, it will have a spill-through effect going forward?
The forecasts are all getting a little lower. But, as I said again, these are kind of guesses and we know what happens to guess. So, the point is you look at data, how it is panning out and are there reasons to believe that the slowdown will be massive in the domestic economy. So, if there are reasons to believe, one should start building those cases. But currently, what is happening is the developed markets are slowing down, so obviously the export side of the economy that will show weakness, so that part of the economy will be impacted.
Stocks which are there in those segments will see slowdown. But all high-frequency indicators for domestic economy seem to be quite robust. I am not saying they are just in a bull market or something like that, but they are quite robust as of now, as we speak.
What is the market analogy and what is the market thesis, sectors that you are still bullish on, recommend buying even at the current levels or for that matter what is it that you are avoiding in the market right now?
Clearly, as I said, there is growth risk in sectors and stocks which are exposed to global demand. But what we are observing is the domestic economy in terms of the capital-intensive sectors like capital goods, utilities, commercial vehicles and pockets of discretionary consumption are seeing the resilience going ahead.
For financials, it is a three-pronged strategy. It is basically, you look at the NPA cycle, you look at the credit growth, and you look at the margins. So, I think as of now and I mean if you look at a forecast FY24 will be the bottom of the decadal downshift in NPAs and so on that front, it is fine. While credit growth is reasonably okay, I am not saying it is like we used to see in earlier cycles. But it is 15-16% and moving along there will be some pressure.
