 "Jyotivardhan Jaipuria, Veda Investment Managers")
It has been a roller-coaster 2016 for the markets. JYOTIVARDHAN JAIPURIA, founder and managing director, Veda Investment Managers, tells Puneet Wadhwa the country remains one of the best placed within emerging markets. Edited excerpts:
What is your outlook for the global and Indian markets for 2017? What are the key events to keep a tab on?
The synchronised monetary policy that we saw across the world since 2008 is now behind us and this will lead to a diversion in equity performances, too. Globally, there are four key events to watch out for. The first one is the path of US monetary policy and the pace of US Fed rate hikes. A possible US fiscal stimulus as articulated by the Donald Trump camp is the second event. The road to Brexit and elections in the European Union (EU), especially in Germany will be the next two events that can impact markets. China will continue to be a worry, on and off, for the markets.
In India, the key event is how quickly things normalise after demonetisation and the timing, and how much short-term disruption is caused by the introduction of the goods and services tax (GST) Bill. Overall, markets will see challenging times in the early part of the year but, hopefully, as some of these policy issues settle, we will see better markets in the later part of the year.
Is there is a strong case for developed markets (DMs) to outperform the emerging markets (EMs) in 2017?
The Trump administration has not yet taken over and their policies are unknown. However, a strong fiscal stimulus in the US and a hawkish US Fed could lead to EMs under-performing. Going by initial statements, if there is a strong fiscal stimulus and it helps sustain the already reasonable growth in the US, it could help the markets there to perform better than the EMs.
But, given the rally already in the markets, if he does not walk the talk, the US markets could see a correction, since expectations are reasonably high. Second, if the pace of Fed rate increases leads to further strength in the dollar, this produces an environment where EMs have typically under-performed.
Within EMs, the consensus is that India is one of the best placed economies, structurally, over the next few years. Yet, in the early part of 2017, India might not be favoured due to two factors — a slower economy due to demonetisation and with a rally in oil prices, commodity producer countries will see an uptick in their economies.
By how many quarters has the demonetisation drive put back a recovery in corporate earnings?
The worst impact was seen in the first couple of weeks and the markets are recovering from those lows. However, the economy is not like a switch, which you turn on and off; with the momentum broken, earnings recovery is unlikely in FY17. There is also a near term de-stocking impact of GST which will play out in the middle of next year. Overall, the markets are bracing for a weak spell of earnings near-term, reflected in current stock prices. Over the next quarter, we expect some more price and time correction.
What are your recalibrated earnings forecasts for the remaining half of FY17 and FY18?
The rest of FY17 will see negative earnings growth and we will end FY17 at zero earnings growth. The timing of GST implementation will partly determine FY18 growth, which could be12-15 per cent, which will largely be back-ended.
What is your advice to individual investors at the current juncture?
While we spend a lot of effort in trying to time the markets, it is very rare that anyone can actually catch the bottom. Second, not all stocks bottom out at the same time. Over the past six weeks, we have seen many good quality companies fall by about 20 per cent. Investors should keep increasing asset allocation to equities over the next four-five months by spreading purchases, like a systematic investment plan.
Is it a good strategy to stick to defensive plays like information technology (IT), pharma and fast moving consumer goods (FMCG) for now?
Our two-three year view is that domestic India sectors will drive earnings growth and the markets. While that view has not changed, the events on November 8 (demonetisation) have meant that over the next few months, we like IT and pharma. We still think pharma is a strong growth story, though FDA (the US drugs regulator) concerns have made the story more volatile. We are underweight on FMCG, mainly due to high valuations. In the near term, we will also see a hit inthe earnings of FMCG companies, due to the impact of demonetisation.
Is there a case for exiting the banking (PSU and Private) and the NBFC sectors given the fundamentals and the run-up seen since the past few months?
There has already been a steep correction in the financial space, especially the NBFCs post demonetisation. While they are operationally impacted and will see poor earnings near-term, we think the financial space is a good way to play the India growth story over next few years. We would buy the private sector banks at this stage and gradually increase our stake in NBFCs on earnings weakness. The impact of demonetisation will help the finance sector. Firstly, the demonetisation has brought practically the entire country into the banking net which is positive for future deposit growth. Secondly, the local money lending business has got hit hard. With individuals now exposed to the banking sector, they may have more access to loans from the formal financial sector.
Oil & gas and metals have been one of the best performing sectors in CY16 thanks to a pick-up in commodity prices. How long will the good times last?
With the agreement on capping oil production globally, we have seen oil prices rally. We think oil prices in 2017 will not reach the lows of 2016 though a large upside beyond $60/barrel is unlikely given that shale gas will come back into the market. Higher oil prices will mean that oil E&P related companies will also see better times. As long as oil marketing companies keep passing on higher oil prices to consumers, their performance will not be hurt. So far indications are that they will increase price. Also, remember, the Government had retained lot of the benefits through higher excise duty and we could see a reduction in the duties, too. Metals is tricky, as the Government had imposed a minimum import price (MIP) to protect the local industry. A withdrawal of the MIP could hurt share prices.
