 "Helpful monetary policy to benefit equities: Rajat Rajgarhia")
The markets quickly learn to move over events and focus on the core aspect of growth and reforms, the outlook for which is currently favourable for India, believes Rajat Rajgarhia, chief executive officer–institutional equities at Motilal Oswal Securities. Progress of the monsoon, earnings recovery and passage of key legislation are the three key domestic triggers, he tells Puneet Wadhwa. Excerpts:
Has Raghuram Rajan’s exit dented foreign investors’ sentiment on India?
Dr Rajan had done a commendable job and restored huge confidence, mainly on the currency front. His exit will surely will be viewed as a bit of disappointment. However, we expect markets and investors to focus on a lot other things. As growth returns in the corporate sector and the monsoon starts covering the rest of the country, investors will look to raise their allocation. We might be looking at a more accommodative monetary policy, which will benefit equities. The markets learn very quickly to move over events and focus on the core, fundamental, aspect of growth and reforms, the outlook for which is currently favourable for India.
How should investors approach the equity markets in the remaining half of calendar year 2016 (CY16)?
The Indian markets have lived through periods of intense volatility over the past 12 months. In 2016 itself, the first six months have seen the markets yielding flat return but with significant volatility. There are three key (domestic) factors to drive equities in the rest of 2016. First, the monsoon's progress will be critical, considering the impact it will bring after two years of drought. Second, the government's success in key reforms such as the GST (goods and services tax) Bill and cleaning up the banking sector will be critical for the economy and market sentiment.
Finally, the earnings growth recovery expected in FY17 will remain key for market returns. We are positive on all three events and, hence, expect equities to deliver positive returns in the second half of the calendar year.
What are the key risks for the markets from here on? How do you see FII (foreign institutional investor) flows for the remaining half of CY16?
The risks for markets are largely global in nature. The US Fed hiking rates, Brexit (Britain's possible exit from the European Union) to a China slowdown keep creating jitters in the financial markets, and in turn, impact markets in the short term.
Over the past 12 months, FII flows have been volatile. Though the FII view remains positive on India, the volatility in global equities and redemptions in many emerging market funds drove outflows earlier. However, the past few months have seen reasonably strong inflows into Indian markets. This will continue, considering that India's growth will be among the best within the comparable economies.
Do you see a sustainable pick-up in consumption over the next few years?
Consumption has remained the driver for growth, as the investment cycle hasn’t picked up. We remain positive on the consumption demand in select categories for the next couple of years. A good monsoon and impact of better government spending will help to create more demand. The markets are positive, not over-optimistic, on the monsoon – after consecutive years of drought, an above-average monsoon could be a key trigger for growth rates to move up and inflation expectations to trend down.
What has been your investment strategy in CY16? Which sectors have you been overweight and underweight on?
We have been positive on domestic-facing sectors. Private lenders led by HDFC Bank and YES Bank, energy companies such as Hindustan Petroleum and Bharat Petroleum, automobile scrips like Tata Motors and Ashok Leyland, consumption plays like Pidilite and Voltas, and the cement sector have been our top picks.
We have been underweight on the information technology, global commodities and capital goods sectors.
How are you dealing with stressed sectors like banks, metals and capital goods, in the backdrop of hardening commodity prices?
The banks will benefit with the rise of commodity prices. Many of the stressed companies in the commodity sector will see better cash flows, helping them to service debt. More, both the working capital and the capex cycle will have a positive impact from a rise in commodity prices.
Given the recent consumer price inflation (CPI) and wholesale price inflation (WPI) numbers, do you think the Reserve Bank's inflation targets could remain a distant dream?
We need the gap between CPI and WPI to converge, which will benefit the economy. With a good monsoon, the CPI is likely to come down in the second half of CY16 and rising commodity prices should boost WPI. From RBI's perspective, there is a very limited window to benefit on the rates. The corporate sector will do well as WPI turns positive.
What is your interpretation of the recent statement by the US Federal Reserve and the outcome of the MSCI meeting on inclusion of China-A shares in its emerging market index?
The US Fed does acknowledge the challenges that persist in the global economy and the impact of that on US growth rates. Rates are going to remain low for a long time and any hikes will be very gradual. This will keep liquidity easy for global equities. Regarding the outcome of MSCI, we believe this event is only delayed. Both these are positive in the near term for Indian equities.
Has Raghuram Rajan’s exit dented foreign investors’ sentiment on India?
Dr Rajan had done a commendable job and restored huge confidence, mainly on the currency front. His exit will surely will be viewed as a bit of disappointment. However, we expect markets and investors to focus on a lot other things. As growth returns in the corporate sector and the monsoon starts covering the rest of the country, investors will look to raise their allocation. We might be looking at a more accommodative monetary policy, which will benefit equities. The markets learn very quickly to move over events and focus on the core, fundamental, aspect of growth and reforms, the outlook for which is currently favourable for India.
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The Indian markets have lived through periods of intense volatility over the past 12 months. In 2016 itself, the first six months have seen the markets yielding flat return but with significant volatility. There are three key (domestic) factors to drive equities in the rest of 2016. First, the monsoon's progress will be critical, considering the impact it will bring after two years of drought. Second, the government's success in key reforms such as the GST (goods and services tax) Bill and cleaning up the banking sector will be critical for the economy and market sentiment.
Finally, the earnings growth recovery expected in FY17 will remain key for market returns. We are positive on all three events and, hence, expect equities to deliver positive returns in the second half of the calendar year.
What are the key risks for the markets from here on? How do you see FII (foreign institutional investor) flows for the remaining half of CY16?
The risks for markets are largely global in nature. The US Fed hiking rates, Brexit (Britain's possible exit from the European Union) to a China slowdown keep creating jitters in the financial markets, and in turn, impact markets in the short term.
Over the past 12 months, FII flows have been volatile. Though the FII view remains positive on India, the volatility in global equities and redemptions in many emerging market funds drove outflows earlier. However, the past few months have seen reasonably strong inflows into Indian markets. This will continue, considering that India's growth will be among the best within the comparable economies.
Do you see a sustainable pick-up in consumption over the next few years?
Consumption has remained the driver for growth, as the investment cycle hasn’t picked up. We remain positive on the consumption demand in select categories for the next couple of years. A good monsoon and impact of better government spending will help to create more demand. The markets are positive, not over-optimistic, on the monsoon – after consecutive years of drought, an above-average monsoon could be a key trigger for growth rates to move up and inflation expectations to trend down.
What has been your investment strategy in CY16? Which sectors have you been overweight and underweight on?
We have been positive on domestic-facing sectors. Private lenders led by HDFC Bank and YES Bank, energy companies such as Hindustan Petroleum and Bharat Petroleum, automobile scrips like Tata Motors and Ashok Leyland, consumption plays like Pidilite and Voltas, and the cement sector have been our top picks.
We have been underweight on the information technology, global commodities and capital goods sectors.
How are you dealing with stressed sectors like banks, metals and capital goods, in the backdrop of hardening commodity prices?
The banks will benefit with the rise of commodity prices. Many of the stressed companies in the commodity sector will see better cash flows, helping them to service debt. More, both the working capital and the capex cycle will have a positive impact from a rise in commodity prices.
Given the recent consumer price inflation (CPI) and wholesale price inflation (WPI) numbers, do you think the Reserve Bank's inflation targets could remain a distant dream?
We need the gap between CPI and WPI to converge, which will benefit the economy. With a good monsoon, the CPI is likely to come down in the second half of CY16 and rising commodity prices should boost WPI. From RBI's perspective, there is a very limited window to benefit on the rates. The corporate sector will do well as WPI turns positive.
What is your interpretation of the recent statement by the US Federal Reserve and the outcome of the MSCI meeting on inclusion of China-A shares in its emerging market index?
The US Fed does acknowledge the challenges that persist in the global economy and the impact of that on US growth rates. Rates are going to remain low for a long time and any hikes will be very gradual. This will keep liquidity easy for global equities. Regarding the outcome of MSCI, we believe this event is only delayed. Both these are positive in the near term for Indian equities.