Don’t buy something just because it appears cheap
What is your view of the equity market in light of rising market valuations?
From a cyclical perspective, the market is yet to reach its peak. Capex cycle, credit growth and capacity utilisation are yet to improve. We believe that equity cycle can peak when capacity utilisation goes up. There is room for earnings to go higher from current levels. However, one should also be ready for intermittent volatility because of global reasons and not so cheap valuations. We believe earnings cycle may play out over the next two years. Capacity utilisation in the Indian corporate sector is low and going forward it is likely to go up. As an incremental output from high capacity utilisation can occur without any capex, operating leverage is likely to contribute significantly to earnings.
In the meantime, private capex cycle is also expected to gather pace. Your takeaways from first quarter results?
The first quarter results have been soft, which was widely expected owing to the short-term impact of demonetisation and the GST overhang. Going forward, earnings are likely to improve once the transitory effects of GST have played out over the next couple of quarters. In addition, there are sectors like financials where the bad debt provisioning cycle is likely to peak this year. Over the next three years, we expect this provisioning cycle to come down, thereby helping earnings.
What are the factors that could bring about a change in investor sentiment?
At present, investor sentiment towards Indian equities is positive. This can be seen from the increased inflows through SIPs and otherwise. At this stage, a dramatic global negative development and substantial changes in Indian fundamentals could lead investors to change their positive stance. As and when real estate rental yields shoot up, inflows into equity could moderate.
Do you expect retail participation to sustain?
At a time when gold and real estate have yielded flat to negative returns and returns from other traditional investment avenues have moderated, equity is the only financial asset that has been delivering consistent returns over the last three years. This factor alone has been one the major reason for increased inflows into equity markets. Going forward, we believe this trend is likely to continue. Above all, investors should understand that past returns may not be replicated in future.
Do you have contrarian views on the beaten-down sectors?
IT and pharma are pockets we are positive on. Pharma as a sector has been under stress owing to FDA related problems. We believe these issues can be sorted out over the next couple of years. It has been seen that when the country prospers, pharma as a percentage of GDP improves. When it comes to IT, we believe that select companies could benefit from the ongoing digital disruption in the information technology space.
Do you expect the government to meet the fiscal deficit targets for 2017-18?
Yes, the government is likely to attain its fiscal deficit target. However, in case there is a shortfall, we believe the markets may not see that as an adverse macro development. The intent of the government towards reigning in fiscal deficit is well understood by the market participants. Unless there is a change in that government stance, we do not see macro factors becoming a cause of concern.
What categories of funds would you advise investors to go for in the current market?
Incremental allocation should be considered in balanced, advantage and dynamic asset allocation category of schemes. In such schemes, the allocation to debt and equity is dynamically managed, thereby allowing investors to take exposure to each asset class, based on their relative attractiveness. How will debt markets fare in the light of global and local macro developments? We are of the view that interest rates are likely to bottom out this year. Nonetheless, from a global perspective, India represents one of the better debt markets to invest in given high-interest rates compared to the entire developed market.
How should one invest in this bull market?
It is often seen that in a bull market, investors tend to forget to practice asset allocation. However, one should remember that asset allocation is the critical factor when it comes to creating long-term wealth. Following one’s pre-determined asset allocation and not going overweight on a particular asset class just because it is performing well is important. The other thing to watch out for is buying something just because it appears cheap, although fundamentally weak.
What are the emerging sectors to consider for long term investment?
We have new areas like stock exchanges, insurance etc in the BFSI segment which are all lined up for listing. Each of these businesses presents an interesting case for long-term investment.
This article was published on September 11, 2017 in ET Wealth