 "Ground realities, pace of reform will drive equities: Dharmesh Mehta")
The equities markets have seen a sharp correction in recent weeks. However, Dharmesh Mehta, managing director and chief executive officer, Axis Capital, feels the downside risk is limited. He tells Rajesh Bhayani & Vishal Chhabria some positive developments could take the markets to newer highs. Edited excerpts:
The markets have fallen nearly 10 per cent in two months. If equities remain muted, will the Initial Public Offer (IPO) market see more offerings?
There is strong interest in IPOs and QIPs (Qualified Institutional Placements) by investors. Axis Capital has already signed 50 mandates in the current year for fund raising and are pitching daily for more. Our view is very optimistic on fund raising and if valuations are reasonable, one will see huge demand in the deals. Also, so many new businesses are coming to the capital markets. It's exciting and challenging. The good news is that the equity markets are open to raise money, very important for a growing economy and corporate industry.
It is too early to take a guess on the monsoon. We have seen projections going horribly wrong in the past. RBI has said if the economic data is better, the monsoon is not as bad as predicted and the crude oil price is stable, they can look at further rate cuts. India’s long-term story is intact and the government is better prepared this time for any abnormal situation. Hence, I am not that worried about the monsoons and we will use this fall to load up on equities.
But, do you see recovery in the near future?
The trend is still positive and it is a healthy correction, which was important. The overall long-term bullish view on the Indian market has not changed, as (the) risk to reward (ratio) is very favourable. The confidence comes from the government putting things in order which don’t make headline news. Also key issues that have triggered the recent fall are rising crude oil prices, a weakening currency and taxation issues, which I believe are behind us.
A falling currency can trigger outflow from debt, as it increases hedging, and other risks and arbitrage also reduce. Isn’t it a looming danger?
We think with inflation subsiding in India and the interest rate differential between the US and India still very high as compared to previous cycles, it is unlikely that debt flows will shun India as in 2013. More, higher crude oil leads to an increase in inflation and in that case, the interest rate cannot be reduced. But, in my view, crude oil has topped out as at higher levels, US shale gas supply becomes more viable, which will cap the crude upside. The rupee has outperformed peers and still looks a better option. Hence, we won't see massive outflows from debt unless there is a huge global crisis and complete risk aversion.
So, things are looking good from here?
The monsoon is a big uncertainty, as of now. It can trigger great bullish or bearish views. A poor monsoon can limit interest rate cuts and weigh on the currency and so on. However, if it remains fairly distributed and crude oil (price) remains capped, things will turn for the better, as the steps taken by the government will start yielding results.
But there is no demand, investment intentions are not materialising…
To kickstart investment and demand, one will need to see Change in India before Make in India. The government is working hard to Change India and one has to be patient. Improvement in demand takes time, especially coming out of the tough few years. For example, the lagged effect of a fall in interest rates, low inflation and a well-distributed monsoon will help rural demand and the next two quarters are crucial for that.
Capital expenditure will improve when there is confidence on sustainability of demand and conviction that the government is fast executing on promises. India Inc will not increase capex only based on hopes and rate cuts. That is why I say the hope rally is over and recovery will be based on improvement in ground realities and in the speed of execution of reform measures. Ease of doing business is another big thing and when this happens, it could bring more investments in large projects. So, Change in India is very important.
What do you advise investors?
This is now a higher-top, higher-bottom market. Hence, any dips like the current one should be used to acquire equities. The last quarter's (of 2014-15) earnings were not as bad as feared and when one sees revival in the Indian economy, suddenly markets and stocks will start looking cheap on FY17 earnings.
Are current valuations reasonable?
I say this is now a stock-specific market. The Sensex is not cheap. Especially, the stocks you want to buy like information technology, consumer goods and pharmaceuticals are very expensive; other sectors are very cheap. Overall, the valuations are reasonable, especially after the recent correction, and individual stocks can still give outstanding returns in a few years.
The markets have fallen nearly 10 per cent in two months. If equities remain muted, will the Initial Public Offer (IPO) market see more offerings?
There is strong interest in IPOs and QIPs (Qualified Institutional Placements) by investors. Axis Capital has already signed 50 mandates in the current year for fund raising and are pitching daily for more. Our view is very optimistic on fund raising and if valuations are reasonable, one will see huge demand in the deals. Also, so many new businesses are coming to the capital markets. It's exciting and challenging. The good news is that the equity markets are open to raise money, very important for a growing economy and corporate industry.
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The Reserve Bank (RBI) has raised monsoon concerns and forecasts have said this will be below normal. Will it take the market further down?
It is too early to take a guess on the monsoon. We have seen projections going horribly wrong in the past. RBI has said if the economic data is better, the monsoon is not as bad as predicted and the crude oil price is stable, they can look at further rate cuts. India’s long-term story is intact and the government is better prepared this time for any abnormal situation. Hence, I am not that worried about the monsoons and we will use this fall to load up on equities.
But, do you see recovery in the near future?
The trend is still positive and it is a healthy correction, which was important. The overall long-term bullish view on the Indian market has not changed, as (the) risk to reward (ratio) is very favourable. The confidence comes from the government putting things in order which don’t make headline news. Also key issues that have triggered the recent fall are rising crude oil prices, a weakening currency and taxation issues, which I believe are behind us.
A falling currency can trigger outflow from debt, as it increases hedging, and other risks and arbitrage also reduce. Isn’t it a looming danger?
We think with inflation subsiding in India and the interest rate differential between the US and India still very high as compared to previous cycles, it is unlikely that debt flows will shun India as in 2013. More, higher crude oil leads to an increase in inflation and in that case, the interest rate cannot be reduced. But, in my view, crude oil has topped out as at higher levels, US shale gas supply becomes more viable, which will cap the crude upside. The rupee has outperformed peers and still looks a better option. Hence, we won't see massive outflows from debt unless there is a huge global crisis and complete risk aversion.
So, things are looking good from here?
The monsoon is a big uncertainty, as of now. It can trigger great bullish or bearish views. A poor monsoon can limit interest rate cuts and weigh on the currency and so on. However, if it remains fairly distributed and crude oil (price) remains capped, things will turn for the better, as the steps taken by the government will start yielding results.
But there is no demand, investment intentions are not materialising…
To kickstart investment and demand, one will need to see Change in India before Make in India. The government is working hard to Change India and one has to be patient. Improvement in demand takes time, especially coming out of the tough few years. For example, the lagged effect of a fall in interest rates, low inflation and a well-distributed monsoon will help rural demand and the next two quarters are crucial for that.
Capital expenditure will improve when there is confidence on sustainability of demand and conviction that the government is fast executing on promises. India Inc will not increase capex only based on hopes and rate cuts. That is why I say the hope rally is over and recovery will be based on improvement in ground realities and in the speed of execution of reform measures. Ease of doing business is another big thing and when this happens, it could bring more investments in large projects. So, Change in India is very important.
What do you advise investors?
This is now a higher-top, higher-bottom market. Hence, any dips like the current one should be used to acquire equities. The last quarter's (of 2014-15) earnings were not as bad as feared and when one sees revival in the Indian economy, suddenly markets and stocks will start looking cheap on FY17 earnings.
Are current valuations reasonable?
I say this is now a stock-specific market. The Sensex is not cheap. Especially, the stocks you want to buy like information technology, consumer goods and pharmaceuticals are very expensive; other sectors are very cheap. Overall, the valuations are reasonable, especially after the recent correction, and individual stocks can still give outstanding returns in a few years.