 "Fund flows to emerging markets will continue: Vineet Bhatnagar")
Although the two key central banks — the US Federal Reserve and the Bank of Japan — kept rates steady in their respective policy reviews recently, Vineet Bhatnagar, managing director and chief executive officer of Phillip Capital (India), tells Puneet Wadhwa that it is very unlikely that easy money policy of global central banks will end soon. Edited excerpts:
Will the easy money policy by global central banks end soon, and the next leg of up-move in risk assets be driven by underlying fundamentals?
It is very unlikely that the easy money policy of global central banks will end soon. The US Fed could raise rates by the end of calendar year 2016 (CY16) or beginning of 2017, but monetary policy will remain accommodative. Recently, Henkel and Sanofi, two private companies, issued medium-term bonds with yield to maturity of minus 0.05 per cent. These are quite clear indicators for interest rate scenario for the next two to three years.
What is the road ahead for the global bond market?
Global bond markets seem to have peaked out but that does not mean there are imminent downside risks. As global central banks’ policy remains accommodative, the risks are not particularly high. There could be volatility in the short term, particularly during Fed meets, but overall, bond markets will do well.
How do you see fund flows panning out to emerging markets (EMs) over the next six to 12 months?
Fund flows to EMs will continue, as EMs are growing faster than the developed markets. In a growth-hungry world fuelled by cheap money, EMs will see consistent inflows. India’s relatively stronger macro-economic fundamentals backed by improving visibility for earnings growth will continue to attract inflows both from long-only, as well as short-term funds.
How are valuations looking currently?
India is expensive compared to other EMs for sure. MSCI emerging markets trade at 12x one-year forward compared to MSCI India at 16x. However, earnings growth over the past five years has been at cyclical low levels. A mean reversion could mean earnings growth is likely to pick up over the next few years. Hence, expensive valuations are more optical.
Is there money to be made in the mid- caps over the next one year? What is your Nifty target for March 2017?
Mid- and small-caps are expensive at current levels, but there are immense opportunities in this space. Specialty chemicals and household products offer considerable opportunities to make money. Our Nifty target is 9,900 for June 2017.
What are your key takeaways from the June quarter earnings? What are the projections for FY17 and FY18?
Earnings were mostly in line with expectations. Overall, the earnings growth was reasonable for the quarter, but more importantly, the quality of earnings seems to be improving steadily. We expect earnings to grow by 14 per cent for FY17 and 18 per cent for FY18.
By when do you see a revival in capex?
Capex cycle is unlikely to see meaningful revival in the next 12-18 months as corporate capex will remain sluggish. Household capex should see revival as lower interest rates, Pay Commission and improving economy starts having an impact.
Which sectors are you overweight and underweight on?
We are overweight on value sectors compared to growth. Our overweight positions are in financial services, metals, mining and utilities; and contra play in telecom.
Can you elaborate your stance on the telecom sector?
The telecom sector’s fortunes are a function of the competitive structure of the industry. The industry is seeing a significant rise in competitive activity because of entry of one large player — Reliance Jio. However, more importantly, the sector is also consolidating. This means improvement in return ratios over the medium term. Valuations are at an all-time low. Bharti Airtel is doing the right things, and it will manage to maintain its market share. Idea Cellular is an acquisition or merger and acquisition play. So, we have contra buys in our portfolio with overweight position for the sector.
The recent index of industrial production (IIP) numbers for July suggest a slowdown in manufacturing. Do you think the markets have overdone the consumption cycle recovery theme?
IIP numbers are quite volatile and do not necessarily capture the true value of output. Consumption theme in India will continue to be dominant, but markets could see some correction in staples and some discretionary categories because of competition.
Will the easy money policy by global central banks end soon, and the next leg of up-move in risk assets be driven by underlying fundamentals?
It is very unlikely that the easy money policy of global central banks will end soon. The US Fed could raise rates by the end of calendar year 2016 (CY16) or beginning of 2017, but monetary policy will remain accommodative. Recently, Henkel and Sanofi, two private companies, issued medium-term bonds with yield to maturity of minus 0.05 per cent. These are quite clear indicators for interest rate scenario for the next two to three years.
What is the road ahead for the global bond market?
Global bond markets seem to have peaked out but that does not mean there are imminent downside risks. As global central banks’ policy remains accommodative, the risks are not particularly high. There could be volatility in the short term, particularly during Fed meets, but overall, bond markets will do well.
How do you see fund flows panning out to emerging markets (EMs) over the next six to 12 months?
Fund flows to EMs will continue, as EMs are growing faster than the developed markets. In a growth-hungry world fuelled by cheap money, EMs will see consistent inflows. India’s relatively stronger macro-economic fundamentals backed by improving visibility for earnings growth will continue to attract inflows both from long-only, as well as short-term funds.
How are valuations looking currently?
India is expensive compared to other EMs for sure. MSCI emerging markets trade at 12x one-year forward compared to MSCI India at 16x. However, earnings growth over the past five years has been at cyclical low levels. A mean reversion could mean earnings growth is likely to pick up over the next few years. Hence, expensive valuations are more optical.
Is there money to be made in the mid- caps over the next one year? What is your Nifty target for March 2017?
Mid- and small-caps are expensive at current levels, but there are immense opportunities in this space. Specialty chemicals and household products offer considerable opportunities to make money. Our Nifty target is 9,900 for June 2017.
What are your key takeaways from the June quarter earnings? What are the projections for FY17 and FY18?
Earnings were mostly in line with expectations. Overall, the earnings growth was reasonable for the quarter, but more importantly, the quality of earnings seems to be improving steadily. We expect earnings to grow by 14 per cent for FY17 and 18 per cent for FY18.
By when do you see a revival in capex?
Capex cycle is unlikely to see meaningful revival in the next 12-18 months as corporate capex will remain sluggish. Household capex should see revival as lower interest rates, Pay Commission and improving economy starts having an impact.
Which sectors are you overweight and underweight on?
We are overweight on value sectors compared to growth. Our overweight positions are in financial services, metals, mining and utilities; and contra play in telecom.
Can you elaborate your stance on the telecom sector?
The telecom sector’s fortunes are a function of the competitive structure of the industry. The industry is seeing a significant rise in competitive activity because of entry of one large player — Reliance Jio. However, more importantly, the sector is also consolidating. This means improvement in return ratios over the medium term. Valuations are at an all-time low. Bharti Airtel is doing the right things, and it will manage to maintain its market share. Idea Cellular is an acquisition or merger and acquisition play. So, we have contra buys in our portfolio with overweight position for the sector.
The recent index of industrial production (IIP) numbers for July suggest a slowdown in manufacturing. Do you think the markets have overdone the consumption cycle recovery theme?
IIP numbers are quite volatile and do not necessarily capture the true value of output. Consumption theme in India will continue to be dominant, but markets could see some correction in staples and some discretionary categories because of competition.
Despite the revenue and profit warning signals, are information technology (IT) stocks a good contrarian bet from a one – two year perspective?
IT sector is now exposed to vagaries of global economic as well as political changes. That apart, technology risks only rise with time. This puts the sector in a precarious position. We have an underweight position on the sector. We like NIIT Technologies in mid-cap IT space.