 "Good monsoon will be a positive trigger for markets: Sachin Shah")
In conversation with Surabhi Roy, Sachin Shah, Fund Manager, Emkay Investment Managers shares his view on market trend, fourth quarter earnings and FIIs inflow. He also shares sectoral outlook and top bets from a near to medium term perspective. Edited excerpts:
Recently, Moody's Investors Service said that India's vulnerability to external shocks have reduced due to low commodity prices and better FDI inflows. How do you see Indian markets placed as compared to other emerging market (EM) peers over the next one year? Where do you project levels for Sensex and Nifty50 in near term? What are your targets for the Sensex, Nifty50 for the next three-six months?
For the last two years, the global macros, in terms of significantly lower oil and other commodity prices, have been in favour of the domestic Indian economy, which is nearly 65-70% dependent on local consumption. This, along with the prudent monetary and fiscal policies both from the Reserve Bank of India (RBI) and the government, has helped India get out of the vicious cycle of higher inflation, higher current account deficit, and higher fiscal deficit etc.
Today, the Indian economy not only has a decent foreign exchange reserve of $350 billion, but also the fiscal deficit, CAD and inflation are well under control. It will give room for the economy to exit an era of high interest rates.
Clearly, the way economic parameters are evolving one would like to believe that India is on its path of getting its house in order and entering the virtuous cycle of multi-year earnings growth. It should help India to attract a higher share of investments from global investors.
In the very near- to medium-term, the market may move in a very narrow trading zone of 7,200-7,600 (on the Nifty). A positive trigger for the markets could be good wide-spread monsoons.
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How do you interpret the developments in the US, China and the EU? Do you think the threat to the Indian market’s rally or its stability is now more from global issues than domestic factors?
As I mentioned earlier, if India continues to get its house in order the impact to the Indian economy from global environment or events can be minimized, as nearly 65-70% of the Indian GDP is domestic consumption.
Surely, slowdown in large growing economies like China and USA have a significant impact on Indian exports and also investment flows, which could create some flutter in some industries, but with the right approach and policies, those could be addressed.
I also believe that in the long-run, the positives of the lower commodity prices outweigh the negatives in terms of lower exports and flows that happen in the intermediate-phase.
How do you see corporate earnings for the March quarter panning out? What is the outlook for the next one year?
The impact of two bad monsoons and letdown of nearly four crops has had a significant impact on demand from semi-urban and rural economy, which has affected the volume and topline growth of most industries. Therefore, for last few quarters, the results of India Inc have been subdued. It will probably take at least two-three quarters more before the earnings growth momentum to pick-up.
What is your investment strategy, given the current scenario? Where should investors place their bets in 2016 in the large-cap segment?
As mentioned earlier, the macros are in favour of the Indian economy and corporate earnings growth is likely to get on to the secular growth trajectory in the next 12-18 months. More importantly, the stock price valuations are very reasonable after the last few months of corrections in the market. It is therefore a very good opportunity for investors to allocate money to Indian equities over a period from starting now to next six months.
We have positive outlook on private sector banking space/NBFCs, auto and auto-ancillary companies, and very selectively for power utilities.
Do you think mid-and-small caps could outperform their larger peers over the next 6-12 months? What are your preferred picks in these segments?
Mid- and small-caps is largely a bottoms-up approach. Therefore, it completely depends on the individual stocks that one invests, and it would therefore not be a very fair comparison to be done of the overall mid and small-cap space with the large-cap indices. Some of the spaces that we have identified as niches to be invested for mid-small-caps stocks are defence, railways, water treatment and travel and tourism.
Which are your top three picks in rate-sensitive sectors such as bank, auto and infrastructure shares for the long term? Banking stocks did well in March in the hope of 50 basis point cut in interest rates. As a tactical call, is it time to exit these stocks as the earnings season has just started and more bad news could flow in?
The stocks where we have been investors for a while in the banking and NBFC space are ICICI Bank, HDFC Bank, Bajaj Finance, LIC Housing, SKS Microfinance. In the auto and auto-ancillary sector, we have exposure to M&M, Hero Motors, Tata Motors, Sundram Fasteners. We have very limited exposure to infrastructure sector say in firms like Guj Pipavav Port and Power Grid. As a policy, we do not try to be tactical traders, we are much disciplined about being long-term investors.
Foreign investors were net sellers in the first two months of the calendar year but were net buyers in March. How long do you see the trend of foreign fund inflows continuing in calendar year 2016?
The trend from FII flows has been quite erratic for last few quarters, therefore would like to avoid any guesses on the same, perhaps will observe them for few more months and see if any trend emerges.