Anil Mascarenhas of IIFL gives you highlights of an interactive session with Tushar Pradhan where he says, “An optimal mix of assets can provide a smooth investment return over the interim; however, more intrepid investors are likely to garner attractive returns if they venture to sail in the equity markets.”
Looking back at 2015, do you think the recovery was as much as anticipated at the start? What do you expect in 2016?
India is one of the very few Emerging Markets (EM) economies to have weathered the currency crisis well and is now on the path of recovery. The macro adjustment process along with a weaker external environment and lackluster rural growth has meant that recovery of growth in 2015 was weaker than expected. The macro narrative over CY2015 was one of softening inflation and weak growth. The credit cycle continued to be difficult. Earnings expectations had to be consistently cut.
How do you see corporate profitability panning out?
We expect a modest recovery in 2016, driven early by better margins – aided by lower input and interest costs – and subsequently a volume recovery. Government-led investment spending and urban consumption are likely to lead with private sector investments and rural consumption lagging. At present, corporate profitability is at a decadal low. Given the rate cuts that have taken place, corporate profitability can double in the next three to four years by margins just reverting to mean.
How has the pace of reforms been?
The Government has done a fair bit to improve the investment environment but remains constrained on reforms requiring legislative action, as they lack numbers in the Upper House of the Parliament. Progress on reform will be a pre-requisite for valuations to expand further.
The growth trajectory is showing initial signs of recovery with a pickup in capex (led by public capex) and discretionary consumer spending. Capex data continues to show robust growth in public projects under implementation, while private projects under implementation lingers in its recovery.
Domestic funds managed to weather the storm of FII selling this year. How do you view the situation going ahead?
FIIs disappeared from markets since April’15 and local investors or DIIs continued their inflows well into the last quarter of the calendar year 2015. However, fatigue is now evident even in local flows. Overhead trendline growth for developed markets, slowing China growth and stress in currencies of emerging markets have kept the global liquidity flows away. The very nature of a bi-polar world, which was the norm in the global economy now looks to change in favour of more muted, but more similar rates of growth across the world. This is a change in the world order and it will lead to some adjustment in the manner in which assets are allocated.
What should one hope for in India?
The macro economic situation in India is improving. Inflation is declining and so are interest rates. However, a lot of the inflation reduction is imported in the form of lower crude oil prices. An errant monsoon and tepid industrial production are the major reasons to be worried about in the near future. The lack of any catalysts to the current scenario may prompt a lot of investors to conclude that there may not be any upside left in the markets in the interim.
Yet, It is darkest before dawn. There is an increasing consternation across the spectrum that not enough has been done on the reforms front . We believe that while serious concerns remain and the sentiment toward equities in general is muted to a certain extent, the longer term outlook for the Indian economy continues to remain robust. As the market corrects over the next few months, the risk reward situation is likely to turn in the favour of Indian equities, as opportunities for alternative investments turn unattractive and foreign funds find India an increasingly attractive destination given very limited options elsewhere globally.
While the current markets cannot be termed inexpensive or cheap, the valuations appear dear only due to the non-deliverance of earnings. Once the earnings growth resumes, the market may look pretty attractive on a 2-3 year basis. Equity investing is always for the longer term and today’s scenario reflects a good time to invest in this asset class.
Which are the sectors you are bullish about?
The first incipient signs of recovery are showing up in some sectors of the economy. Auto sales in commercial as well as passenger vehicles - are seeing a sharp uptick. Interest rates are headed lower, and will further sustain the momentum as liquidity in the system remains comfortable. While banks still are long way away from starting to lend aggressively as they are constrained for lack of capital. Private banks and NBFCs are much better positioned for these opportunities especially in areas of personal finance, housing and auto finance.
Infrastructure spending, while not in full flow, is showing up in the orders placed for road construction, certain urban infrastructure projects and in water management. Companies aligned to these activities are definitely in line for some good times driven by these factors.
Export oriented businesses are likely to see some stability in earnings given the weakness in the INR as well as the prospect of a strong dollar outlook for the next year. Volumes in most industries continue to look up, given the debottlenecking of freight corridors and enablement of transport of commodities.
What are your expectations from the Union Budget?
The imperative to kick-start the economy places some pressure on the Government to announce a pro-growth budget early next year. We believe that, certain select sectors which I mentioned and those individual companies that are able to exploit the current environment, may provide significant opportunity to investors.
What is your message to investors?
We had emphasised an asset allocation approach at the beginning of the last year and we continue to emphasise the same going forward. An optimal mix of assets can provide a smooth investment return over the interim; however more intrepid investors are likely to garner attractive returns if they venture to sail in the equity markets. While the journey may be stormy, the destination will indeed be well worth the trouble!