 "Gradually increase your allocation to stocks: Gopal Agrawal")
Gopal Agrawal, investment chief, Mirae Asset Global Investments, tells Puneet Wadhwa though ‘UK exit’ will create short-term volatility, local markets offer decent gains if earnings estimates are met. Edited excerpts:
Has Brexit completely derailed the rally in global equity markets?
Brexit will create short-term volatility as currencies across the globe will readjust, hence various businesses will be impacted differently. There will also be a moderately negative impact on global growth. This vote doesn’t mean automatic termination of European Union (EU) membership. Britain will have to invoke Article 50 of the Libson Treaty that will begin the exit. Once this is done, it will have a two-year window to negotiate a new treaty to replace the terms of EU membership. India will have the least direct impact as our exports to the whole of EU are below two per cent of GDP (gross domestic product).
How should investors approach equity markets in the remaining half of calendar year 2016? What is the upside potential?
As regards India, the earnings cycle has bottomed out and the government is working hard to improve the business and job environments by announcing numerous initiatives. The outlook for equity markets is getting better. Investors should gradually increase their allocation to equities. The market is trading at 15x financial year 2017-18, which offers a decent upside potential (in line with nominal GDP growth rate) if earnings growth expectations are met and the monsoon is properly distributed.
How are foreign institutional investors (FIIs) viewing India?
In general, FIIs are positive on India, their highest overweight stance is on India (13.8 per cent portfolio weight versus eight per cent benchmark weights) in the GEM (global emerging market) MSCI index. Recent measures to open foreign direct investment (FDI), improving ease of doing business and boosting employment will enhance their positive outlook. Globally, inflation and yields are very low. Though it may affect the investment cycle, it offers an opportunity for India to channelise this low-cost funds towards infrastructure.
What has been your investment strategy in 2016? Which sectors have you been overweight and underweight on?
Our investment strategy revolves around buying scalable and competitive businesses that are run by competent managements with decent ROE (return on equity) and ROCE (return on capital employed) and ideally compounding growth equal or higher than nominal GDP growth. We are significantly overweight on the consumption theme as lower inflation, tailwind of lower commodity prices will results in higher margins, while urbanisation and a young population will drive demand. It is likely to improve further with the implementation of the Seventh Pay Commission’s award and possible passage of the goods and services tax Bill. We are overweight on consumer discretionary, financials, media and industrials; while remaining underweight on IT (information technology) and energy sectors.
The government seems to be in a reform overdrive now. How are you viewing the developments and are there any sectors that merit an investment?
We expect across the board investment chances in sectors such as cement, construction, insurance, logistics and defence, as the government is clearing bottlenecks, cleaning the system and helping increase FDI, create employment and boosting exports.
Are the days for classical defensive plays like FMCG, pharmaceuticals and IT over?
We don’t think the story for FMCG, pharma and IT is over. Indian pharma and IT companies are highly successful and globally competitive with good scale of operations. Valuation of these sectors is now below one standard deviation over the market valuation, which offers comfort in an environment of currency war to boost exports. FMCG is relatively expensive, which may have time correction, but offers good medium-to-long-term potential.
Has Brexit completely derailed the rally in global equity markets?
Brexit will create short-term volatility as currencies across the globe will readjust, hence various businesses will be impacted differently. There will also be a moderately negative impact on global growth. This vote doesn’t mean automatic termination of European Union (EU) membership. Britain will have to invoke Article 50 of the Libson Treaty that will begin the exit. Once this is done, it will have a two-year window to negotiate a new treaty to replace the terms of EU membership. India will have the least direct impact as our exports to the whole of EU are below two per cent of GDP (gross domestic product).
How should investors approach equity markets in the remaining half of calendar year 2016? What is the upside potential?
As regards India, the earnings cycle has bottomed out and the government is working hard to improve the business and job environments by announcing numerous initiatives. The outlook for equity markets is getting better. Investors should gradually increase their allocation to equities. The market is trading at 15x financial year 2017-18, which offers a decent upside potential (in line with nominal GDP growth rate) if earnings growth expectations are met and the monsoon is properly distributed.
How are foreign institutional investors (FIIs) viewing India?
In general, FIIs are positive on India, their highest overweight stance is on India (13.8 per cent portfolio weight versus eight per cent benchmark weights) in the GEM (global emerging market) MSCI index. Recent measures to open foreign direct investment (FDI), improving ease of doing business and boosting employment will enhance their positive outlook. Globally, inflation and yields are very low. Though it may affect the investment cycle, it offers an opportunity for India to channelise this low-cost funds towards infrastructure.
What has been your investment strategy in 2016? Which sectors have you been overweight and underweight on?
Our investment strategy revolves around buying scalable and competitive businesses that are run by competent managements with decent ROE (return on equity) and ROCE (return on capital employed) and ideally compounding growth equal or higher than nominal GDP growth. We are significantly overweight on the consumption theme as lower inflation, tailwind of lower commodity prices will results in higher margins, while urbanisation and a young population will drive demand. It is likely to improve further with the implementation of the Seventh Pay Commission’s award and possible passage of the goods and services tax Bill. We are overweight on consumer discretionary, financials, media and industrials; while remaining underweight on IT (information technology) and energy sectors.
The government seems to be in a reform overdrive now. How are you viewing the developments and are there any sectors that merit an investment?
We expect across the board investment chances in sectors such as cement, construction, insurance, logistics and defence, as the government is clearing bottlenecks, cleaning the system and helping increase FDI, create employment and boosting exports.
Are the days for classical defensive plays like FMCG, pharmaceuticals and IT over?
We don’t think the story for FMCG, pharma and IT is over. Indian pharma and IT companies are highly successful and globally competitive with good scale of operations. Valuation of these sectors is now below one standard deviation over the market valuation, which offers comfort in an environment of currency war to boost exports. FMCG is relatively expensive, which may have time correction, but offers good medium-to-long-term potential.
After an addition of over 3.6-lakh folios, as per reports, in the first two months of the current fiscal, do you expect the interest of retail investors to ebb in H2CY16 given the market volatility?
Retail investors should increase allocation towards equities with SIP/STP route. As the economy is on mend, the government is resolving bottlenecks and taking proactive policy actions, supported by improved allocation towards infrastructure and lower subsidy. It augurs well for better investment climate and good returns from the market in medium to long-term.
Are you seeing increased allocation to Mirae Asset Great Consumer Fund given the increased focus on consumption in the likelihood of above-normal monsoon?
The fund has started getting regular inflows, and we believe as investors experience and are convinced on the consumer theme, the fund will grow. Increasing disposable income, improved life style and young population augurs well for this fund .The fund has generated 16.1 per cent CAGR (compounded annual growth rate) returns since inception, which may act a guide.