We are positive on construction for almost 2 years now and one big factor which supports our optimism is that a lot of government money is going into that sector

GDP growth at 8.2 percent for the June quarter is a strong sign but the number itself should not be taken as a strong indicator of growth, Neelkanth Mishra, MD and India economist and strategist, Credit Suisse said in an interview with CNBC-TV18.

If we analyse the June quarter results for companies, most of the results have come off from a weak or a low base, highlights Mishra.

If we remember the period in the run-up to the start of the Goods & Services Tax (GST) regime, there was significant inventory reduction in the economy which led to a fall in industrial growth last year.

“The fact that we grew at 10.3 percent is not surprising. On a 2-year CAGR basis, the growth is flat. The trend growth is continuing but what worries me is that even at this growth we are running a balance of payment deficit and therefore this growth appears unsustainable,” added Mishra.

What are lead indicators suggesting?

One of the lead indicators which is suggesting a recovery in the economy is the construction sector. A lead indicator is any factor which changes before the rest of the economy begins to head towards the same direction as the lead indicator.

We are positive on construction for almost 2 years now and one big factor which supports our optimism is that a lot of the government money is going into that sector, especially on road construction front, added Mishra.

“To add to it, there is more than Rs 2 trillion worth of projects happening in Mumbai itself. There are over 15 cities which are building Metro rail. However, the challenge is from the consumption space,” he added.

Where is metal sector headed?

Commenting on the metals, Mishra said that we are in the middle of very significant risk aversion. There is uncertainty around issues of trade wars and if the US Fed also raises rates significantly it will add pressure to emerging markets (EMs) which were earlier getting benefitted from inflows.

As the reversal happens there is a high likelihood that the growth will slow down. Metal is a sector which is determined by what’s happening in China. “Our own view is that we are seeing some revival in the sector and as policy starts to support growth again will lead to a bounceback in stocks,” added Mishra.

“There are some steel stocks which on current profitability are at 20% free cash flow yields and generally when profitability improves PE and EBITDA multiples will correct and we are seeing that happening. Also, metal stocks benefit from a weak rupee,” he added.


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