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Replying to Sarika Kodag of IIFL, Manas Shukla says, “Global economies are battling low inflation and tepid growth as commodities have slumped to multi-year lows.”
What is your outlook on Indian and global markets?
For India, last year was a tale of robust macro not translating to better micro. Gains from lower commodity prices and government’s reform-oriented push resulted in lower fiscal and current account deficit as also benign inflation, and propelled India to lead the growth charts among the developing nations. However, aggregate corporate earnings declined as companies grappled with slowing global economy, falling commodity prices, fragile rural demand hit by two consecutive bad monsoons and stressed balanced sheets capping investments.
Global economies are battling low inflation and tepid growth as commodities have slumped to multi-year lows. As a result, central banks world over have chartered into the unknown territory of negative interest rates to rescue their economies while the US Fed raised its interest rate for the first time since 2006, led by tight labour conditions and healthy consumer sentiment. As earnings peaked amidst gloomy global backdrop, premium valuations got knocked off, resulting in ~10% decline in Nifty while Indian rupee depreciated ~7% against the USD.
What according to you is the current health of the Indian economy?
Domestic markets surged at the end of the month (Nifty: +4.0%) led by better corporate earnings and stable global cues. Initially, markets were jittery as comments from the US Fed officials hinted at a rate hike as early as June/July, that fueled a rally in the dollar index. However, encouraging economic data from the US soothed investor concerns that the economy can withstand higher interest rates. Despite the rally in dollar index, crude oil gained further due to supply side constraints. Overall, select index heavyweights propelled domestic markets to 2016 highs, while the performance of broader markets was under-whelming (~20% of Nifty weight contributed ~60% to overall Nifty movement). On the other hand, Rajya Sabha also passed the new Bankruptcy Code to address corporate debt issues and improve business conditions, and India and Mauritius signed an agreement to tax capital gains on shares transactions arising from Mauritius after April 1, 2017.
From corporate earnings standpoint, cement, financials and capital goods surprised positively; IT, auto, oil & gas, private banks and FMCG results were in-line, while PSU Banks and pharmaceutical results were below expectations. Overall, India Inc. is showing signs of improvement, though a lot still has to be done. Signs of a better tomorrow are becoming prominent, with things like Land Acquisition and GST already being in discussion, and will be instrumental, going forward.
Where do you see the markets heading by March 2017?
Deflation in commodities will continue to baffle global policy makers, in their efforts to revive growth and inflation. Government’s fiscal prudence coupled with the possibility of normal monsoon this year, could allow RBI to reduce benchmark rates and stimulate growth. However, sustaining current valuations, which are trading at a premium to historical average, necessitate earnings recovery. We believe, a normal monsoon, thrust in government spending and de-leveraging of balance sheets, could revive earnings growth while global recovery hinges on stability of commodity prices. We are cautiously optimistic on domestic demand and earnings growth while global demand could remain volatile.
Why the ETF market is not developed in India as compared to other markets?
There are various reasons for ETFs not becoming as popular in our country as others. These include low equity penetration in our country, non availability of good fundamental / factor Indices, high cost of funding in India for the market makers and STT on the underlying making the spreads high and reducing liquidity, no incentive to distribute ETFs for the advisors and last but not the least, no added benefit to the final investor.
Do you see the ETF landscape changing in India?
For all the reasons resulting in slow ETF growth in India, there have been some positives as well. We witnessed that the government is focusing on increasing ETF penetration and came out with disinvestment plans through the ETF route, resulting in the popularity of the product going up. They also allowed institutions like Insurance and Provident Funds to invest into ETFs. Coupled by the emergence of Factor Indices performing as good as any large cap scheme at 1/5 the cost, soon ETFs may emerge as the investment vehicle of choice for our investors.
Why is the active fund sector in India so big compared to the ETF segment?
India is still very low in terms of equity penetration and financial products are still “sold” to the client and not ‘bought’ by them on their own. Hence, distributors plays a key role in distribution of mutual fund products. However, ETFs don’t offer any distribution incentives like mutual funds. Hence, they have not really been adopted by the distributors in their product suite. Also as mentioned earlier, there were no “smart” products and indices like “Nifty Quality30” which would deliver performance as good as a large cap funds, if not better, to fulfill the ETF requirement in that space. Thus, investors took the product which was made available to them, performing better than broad market.
How do you see the Indian ETF market growing?
With emergence of ETFs on factor-based indices, savvy investors will find ETFs forming a major portion in their large cap equity portfolio holdings. This is because these indices would deliver similar, if not better performance, to the overall large cap equity mutual fund category at almost 1/5 the cost.
What are the new developments in the ETF segment?
ETF providers and index construction is moving to the next phase with new indices emerging, which would deliver better risk-adjusted performance at commensurately very low cost than an active management. Few factor based indices have already products rolled out (eg: Edelweiss ETF – Nifty Quality 30). Also, index providers are working on new index development at the same time, to provide investors and their advisors, full product suite to run their asset allocation model.
What strategy would you suggest for retail investors in the current market?
For a retail investor, the strategy remains simple. Do a Systematic Equity Plan (also known as Stock SIP) offered by almost all major brokers, in a good factor-index based ETF (e.g. Edelweiss ETF – Nifty Quality 30). This may have the potential to outperform broader index, and accumulate these ETF units for the large cap portfolio requirements. For mid-cap and small-cap, one may continue with the regular systematic investment plans (SIP) with mutual funds.