 "Fall in commodity prices to impact second quarter earnings: Mihir Vora")
Mihir Vora, Director & Chief Investment Officer, Max Life Insurance expects the markets to remain range-bound till December. Though he expects returns in-line with earnings growth at about 15% in the next year, he advises investors to remain invested on non-leveraged construction companies, private-sector banks / finance companies and auto / auto-part manufacturers. Edited excerpts of an interview with Surabhi Roy:
Markets are in consolidation mode after hitting nearly 2-month high last week on hopes that the US Federal Reserve won't lift interest rates until 2016 and signs of some stability in oil and commodity markets. What levels do you see for the Sensex and Nifty by the end of the calendar year 2015?
While the US economy has reported strong data for most of this calendar year, in the past couple of months, downside risks to that growth have emerged. Europe and Japan continue on a low-growth trajectory and China has also shown signs of slower growth. This lower growth and the depreciation of the Chinese Yuan were the cause of the global volatility seen in August. The correction saw most asset classes including equities and commodities fall.
Given the huge movements seen in the past few weeks, markets should see a period of consolidation. In the next few months, Indian markets will remain range-bound within a range of 0 to 5% till December.
What are your expectations from Q2 results of Sensex companies? How do valuations look at these levels and what are the returns that you expect over the next 6 – 12 months?
At an aggregate level, the September quarter profit growth will not look great. This is because of the sharp fall in commodity prices. Metals, Oil and most commodities were down sharply during the last quarter so margins for companies in the metals, oil & gas etc. segments will be down.
Moreover, there may also be inventory accounting losses. The absolute level of profits of these segments as a proportion of aggregate index profits is significant. Other large sectors like private sector banking, IT, Pharmaceuticals, Consumers, Industrials etc. are growing but the earnings growth will not be enough to bring up the aggregate.
The positive is that for the coming few quarters, we have a low base to work off. The current low base is because of compressed margins as well as high interest rates. We expect margins to improve in many segments as material prices have reduced. Net profit growth will further be bolstered by a reduction in interest rates. Thus earnings growth is likely to be ahead of sales growth in the coming quarters.
For the next financial year ending March 2017, the profit growth numbers are likely to be healthy at 15-17% growth, compared to the single-digit growth expected for the year ending March 2016. However, aggregates can be misleading.
There are pockets of growth in any market or economic condition and the key is to focus on these rather than take a pure top-down approach. We see good growth in segments like road-building, railways, defense, pharma, automobiles.
Valuations are at long-term averages and we expect market returns in line with earnings growth at about 15% in the next year.
What is your take on rate sensitive shares after the RBI surprised the street by cutting the repo rate by 50 bps to 6.75%?
We have been bullish on rate-sensitives including banks, NBFC, auto and industrials for quite a while now and we continue to maintain that stance. However, within the banks we prefer the private sector ones compared to the public-sector banks given the continuing NPA issues.
How much of an impact will Bihar elections have on the markets? How much of an upswing do you foresee if Modi government comes into power?
The Bihar elections can, at best, impact the market sentiment in the short-term. In the medium term local and global central bank actions and Government’s success in key initiatives like passage of the GST bill and execution of projects in railways, defense, infrastructure and mining are factors which will drive the economy and markets.
How do you expect FIIs to react beyond October?
Given India’s current strength and relatively high interest rates, we see foreign flows through the FDI route as well as the portfolio route to continue. Moreover, we expect inflows into equities as well as fixed income as the RBI has opened more limits for foreign investors.
What is your investment strategy in the current market scenario? Would you throw light on your asset allocation philosophy?
Fundamentally, in a world exhibiting weak growth, India is an exception. The commodity price slide has delivered a sharp and positive terms-of-trade shock, lower inflation which will support the currency and fixed income markets. The average oil price this year is USD 30 less than the price last year.
This means a benefit of Rs 1,50,000-2,00,000 crore on the trade deficit because of reduction in the oil import bill. It also adds to benefits on the fiscal deficit, inflation and ultimately to domestic consumption.
Interest rates and inflation are headed down in India. We are thus positioned for a slow cyclical upturn in the economy, with Government spending leading the way followed by private-sector participation in due course.
Our investment philosophy is to buy good quality stocks with visible growth triggers, at a reasonable price. We are positive on non-leveraged construction companies, private-sector banks / finance companies and auto / auto-part manufacturers.
We have identified sectors which are likely to be growth leaders e.g. road-building, railway, defense, multiplexes, mining equipment etc. and have focused on these segments of the market.
Since FPI limits in government bonds have been raised in the recent RBI policy, do you see this having an impact on corporate bond demand?
We see significant flows continuing to the fixed income markets. In the recent past, the Government bond limits were used up and hence we saw foreigners invest in corporate bonds as the second option. With additional limits opening up for Government bonds, incremental flows may prefer these.
However, the limits are being opened in a staggered fashion and will not be available on tap. Thus the impact, if any, on corporate bond spreads will be muted since the overall demand from local and foreign investors continues to remain strong.
With the 50 bps rate cut by RBI, is there any tweaking of duration in long term funds?
We have been following a long-duration strategy for a while and this will continue in the medium-term as we expect interest rates to fall in the next 12 months.
Markets are in consolidation mode after hitting nearly 2-month high last week on hopes that the US Federal Reserve won't lift interest rates until 2016 and signs of some stability in oil and commodity markets. What levels do you see for the Sensex and Nifty by the end of the calendar year 2015?
While the US economy has reported strong data for most of this calendar year, in the past couple of months, downside risks to that growth have emerged. Europe and Japan continue on a low-growth trajectory and China has also shown signs of slower growth. This lower growth and the depreciation of the Chinese Yuan were the cause of the global volatility seen in August. The correction saw most asset classes including equities and commodities fall.
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The MSCI Global Equity Index was down 9% and the CRB Commodity Index was down 15% between July to September. The tentative state of the markets was quoted by the Fed as a reason for not raising rates. Our view for a long time has been that these ‘muddle-through’ conditions will continue for the global economy and central banks globally will keep liquidity ample by lower interest rates and various forms of quantitative easing mechanisms, in the medium-term.
Given the huge movements seen in the past few weeks, markets should see a period of consolidation. In the next few months, Indian markets will remain range-bound within a range of 0 to 5% till December.
What are your expectations from Q2 results of Sensex companies? How do valuations look at these levels and what are the returns that you expect over the next 6 – 12 months?
At an aggregate level, the September quarter profit growth will not look great. This is because of the sharp fall in commodity prices. Metals, Oil and most commodities were down sharply during the last quarter so margins for companies in the metals, oil & gas etc. segments will be down.
Moreover, there may also be inventory accounting losses. The absolute level of profits of these segments as a proportion of aggregate index profits is significant. Other large sectors like private sector banking, IT, Pharmaceuticals, Consumers, Industrials etc. are growing but the earnings growth will not be enough to bring up the aggregate.
The positive is that for the coming few quarters, we have a low base to work off. The current low base is because of compressed margins as well as high interest rates. We expect margins to improve in many segments as material prices have reduced. Net profit growth will further be bolstered by a reduction in interest rates. Thus earnings growth is likely to be ahead of sales growth in the coming quarters.
For the next financial year ending March 2017, the profit growth numbers are likely to be healthy at 15-17% growth, compared to the single-digit growth expected for the year ending March 2016. However, aggregates can be misleading.
There are pockets of growth in any market or economic condition and the key is to focus on these rather than take a pure top-down approach. We see good growth in segments like road-building, railways, defense, pharma, automobiles.
Valuations are at long-term averages and we expect market returns in line with earnings growth at about 15% in the next year.
What is your take on rate sensitive shares after the RBI surprised the street by cutting the repo rate by 50 bps to 6.75%?
We have been bullish on rate-sensitives including banks, NBFC, auto and industrials for quite a while now and we continue to maintain that stance. However, within the banks we prefer the private sector ones compared to the public-sector banks given the continuing NPA issues.
How much of an impact will Bihar elections have on the markets? How much of an upswing do you foresee if Modi government comes into power?
The Bihar elections can, at best, impact the market sentiment in the short-term. In the medium term local and global central bank actions and Government’s success in key initiatives like passage of the GST bill and execution of projects in railways, defense, infrastructure and mining are factors which will drive the economy and markets.
How do you expect FIIs to react beyond October?
Given India’s current strength and relatively high interest rates, we see foreign flows through the FDI route as well as the portfolio route to continue. Moreover, we expect inflows into equities as well as fixed income as the RBI has opened more limits for foreign investors.
What is your investment strategy in the current market scenario? Would you throw light on your asset allocation philosophy?
Fundamentally, in a world exhibiting weak growth, India is an exception. The commodity price slide has delivered a sharp and positive terms-of-trade shock, lower inflation which will support the currency and fixed income markets. The average oil price this year is USD 30 less than the price last year.
This means a benefit of Rs 1,50,000-2,00,000 crore on the trade deficit because of reduction in the oil import bill. It also adds to benefits on the fiscal deficit, inflation and ultimately to domestic consumption.
Interest rates and inflation are headed down in India. We are thus positioned for a slow cyclical upturn in the economy, with Government spending leading the way followed by private-sector participation in due course.
Our investment philosophy is to buy good quality stocks with visible growth triggers, at a reasonable price. We are positive on non-leveraged construction companies, private-sector banks / finance companies and auto / auto-part manufacturers.
We have identified sectors which are likely to be growth leaders e.g. road-building, railway, defense, multiplexes, mining equipment etc. and have focused on these segments of the market.
Since FPI limits in government bonds have been raised in the recent RBI policy, do you see this having an impact on corporate bond demand?
We see significant flows continuing to the fixed income markets. In the recent past, the Government bond limits were used up and hence we saw foreigners invest in corporate bonds as the second option. With additional limits opening up for Government bonds, incremental flows may prefer these.
However, the limits are being opened in a staggered fashion and will not be available on tap. Thus the impact, if any, on corporate bond spreads will be muted since the overall demand from local and foreign investors continues to remain strong.
With the 50 bps rate cut by RBI, is there any tweaking of duration in long term funds?
We have been following a long-duration strategy for a while and this will continue in the medium-term as we expect interest rates to fall in the next 12 months.