 "Challenges for stock markets are here to stay in near term: Pankaj Murarka")
With shares trading nearly 15 per cent lower than their recent peaks, steep volatility is causing concerns. Pankaj Murarka, head of equities at Axis Mutual Fund, does not rule out another sell-off. According to him, that will be one of the opportunities to invest in the India story. In an interview with Chandan Kishore Kant, he talks about challenges plaguing the economy. Edited excerpts:
How long will the current sharp volatility continue in Indian stock markets?
In the near term, markets can remain challenging. We have to learn to live with volatility. If something goes wrong globally, which triggers a sell-off, of the kind we saw in the last few months, I do not rule out one. But, that will be a great opportunity to invest in India. The growth is elusive in the western economies, they are in deflation and central banks are pursuing extraordinary monetary policies. There are significant challenges. Despite three rounds of quantitative easing the US economy is still struggling to grow beyond 2.5 per cent. Europe has its own set of challenges. This has only got compounded as China, the world's growth engine, is slowing, impacting global growth. So, globally it will remain a challenging environment in the foreseeable future. The challenge for the world will sustain for much longer. If we can get our policy making and execution right, we can clearly emerge from the shadow as a significant driver of world's growth.
While we keep all these things at the back of our mind, we keep a focus on completely bottom-up investing. Even in the current environment, with growth at six per cent, there are enough companies growing at 15-20 per cent. And if one can find 30-40 of those companies, my job is done as a portfolio manager.
Are there any sector-specific calls?
We like financials from a very long term perspective. As India grows, the banking sector will be at the very centre of it. For the time being, our bias is for the private lenders because state-owned ones have challenges on the asset quality front. Second, there is a lot of legacy issue in public sector banks. These institutions will have to transform themselves to deal with it in current realities and compete in the marketplace. They need to hire the best of the talents for which they need to change. We continue to be bullish on private sector banks.
Is the capex cycle turning?
I think our investment cycle is broken because of the stalled projects and policy issues we had. We need to put it back together. There is a complete lack of investment from the private sector. The government is trying to take measures but the private sector is not making any investments. It's important to put investment cycle back on track. There has to be significantly more policy action from the government to bring back confidence of the businesses in the whole architecture of policy making. Because we have seen coal blocks cancellation, mining licences being taken back and for many projects there is no land - all these have hurt the private sector badly. There is significant leverage on the private sector, which also constraints their ability to make new investments. I am not very optimistic on significant improvement in the capex cycle in the medium term.
Where do you see the growth coming from then, from a two-year perspective?
We see some improvement on the road investment side. Further, the railways have announced an ambitious plan where they are doubling capital outlay for the next five years. Hopefully, in the six months to a year, we can see uptick in the railway capex. It will benefit engineering, coaches and wagon making companies. It will touch across capital goods and engineering space. But, we need to do significantly more with the infrastructure space and there is need to enhance manufacturing. Services beyond a point can't outgrow manufacturing.
The US Federal Reserve chose to keep rates unchanged. You expect the Reserve Bank of India to cut rates?
I think RBI will cut rates. India has the highest real rates in the world. In the next six to nine months, if inflation remains benign the way it is, we can easily see a rate decline of about 75 basis points.
How long will the current sharp volatility continue in Indian stock markets?
In the near term, markets can remain challenging. We have to learn to live with volatility. If something goes wrong globally, which triggers a sell-off, of the kind we saw in the last few months, I do not rule out one. But, that will be a great opportunity to invest in India. The growth is elusive in the western economies, they are in deflation and central banks are pursuing extraordinary monetary policies. There are significant challenges. Despite three rounds of quantitative easing the US economy is still struggling to grow beyond 2.5 per cent. Europe has its own set of challenges. This has only got compounded as China, the world's growth engine, is slowing, impacting global growth. So, globally it will remain a challenging environment in the foreseeable future. The challenge for the world will sustain for much longer. If we can get our policy making and execution right, we can clearly emerge from the shadow as a significant driver of world's growth.
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How are you positioning your portfolio?
While we keep all these things at the back of our mind, we keep a focus on completely bottom-up investing. Even in the current environment, with growth at six per cent, there are enough companies growing at 15-20 per cent. And if one can find 30-40 of those companies, my job is done as a portfolio manager.
Are there any sector-specific calls?
We like financials from a very long term perspective. As India grows, the banking sector will be at the very centre of it. For the time being, our bias is for the private lenders because state-owned ones have challenges on the asset quality front. Second, there is a lot of legacy issue in public sector banks. These institutions will have to transform themselves to deal with it in current realities and compete in the marketplace. They need to hire the best of the talents for which they need to change. We continue to be bullish on private sector banks.
Is the capex cycle turning?
I think our investment cycle is broken because of the stalled projects and policy issues we had. We need to put it back together. There is a complete lack of investment from the private sector. The government is trying to take measures but the private sector is not making any investments. It's important to put investment cycle back on track. There has to be significantly more policy action from the government to bring back confidence of the businesses in the whole architecture of policy making. Because we have seen coal blocks cancellation, mining licences being taken back and for many projects there is no land - all these have hurt the private sector badly. There is significant leverage on the private sector, which also constraints their ability to make new investments. I am not very optimistic on significant improvement in the capex cycle in the medium term.
Where do you see the growth coming from then, from a two-year perspective?
We see some improvement on the road investment side. Further, the railways have announced an ambitious plan where they are doubling capital outlay for the next five years. Hopefully, in the six months to a year, we can see uptick in the railway capex. It will benefit engineering, coaches and wagon making companies. It will touch across capital goods and engineering space. But, we need to do significantly more with the infrastructure space and there is need to enhance manufacturing. Services beyond a point can't outgrow manufacturing.
The US Federal Reserve chose to keep rates unchanged. You expect the Reserve Bank of India to cut rates?
I think RBI will cut rates. India has the highest real rates in the world. In the next six to nine months, if inflation remains benign the way it is, we can easily see a rate decline of about 75 basis points.