 "Investors need to temper return expectation this fiscal: Harshad Patil")
In the midst of market consolidation, Harshad Patil, CIO, Tata AIA Life Insurance shares his view with Peter Noronha on market trends in view of the corporate earnings, government policies and outlook on sectors. Edited excerpts:
The equity markets have corrected in this financial year. How do valuations look at these levels and what are the returns that you expect over the next 6 – 12 months?
By now, it is well understood that FY15 was a year of outsized returns for the Indian equity market with the Benchmark indices S&P BSE Sensex and CNX Nifty surging 24.89% and 26.65%, respectively. The CNX Midcap index performed even better. This rise in the equity markets during the last financial year was largely a one way movement with no meaningful correction. Since then, the equity markets have corrected sharply.
The recent weakness is broadly a reflection of weak corporate earnings, surge in international crude oil prices albeit from low levels, uncertainty over the passage of key legislations such as land acquisition and the GST bill as well as expectations of a weak monsoon from the Indian Metrological Department (IMD). These headwinds could not be offset by the improving macro situation signalled by factors such as lower inflation.
All things considered, we believe that the equity markets continue to offer the comfort of reasonable valuations for a long-term investor with a three – five year view. Given this backdrop, it would be prudent for investors to temper their return expectation this fiscal as compared to the last fiscal and stay invested as the building blocks of a multi- year bull market are intact.
The corporate earnings have been disappointing and there have been earnings downgrades for FY15 and FY16. By when do you see a revival in corporate earnings in India?
In the medium-term, Indian economy is poised for a prolonged period of sustained growth recovery accompanied by low and stable inflation. This provides a backdrop for the interest rates to nudge down further in response to the government’s supply-side reforms led by a meaningful rise in infrastructure spending.
We believe that higher GDP growth trajectory, lower inflation, muted commodity prices feeding into lower input costs, lower interest rates and government's determined effort to deliver reforms are key catalysts for improving corporate earnings over the next few quarters. While the growth in earnings in the immediate quarters may remain muted, we see the earnings growing at 16-18% CAGR over the next two years.
The government has been trying to hasten the reform process and turn around the economy. Are these efforts bearing fruit and how long will it take for economy to pick pace?
The government has been able to secure the passage of far reaching of key economic bills pertaining to insurance, coal and mineral sector. The landmark legislations will facilitate more investments in these large sectors of the economy in the medium-term. In addition, the government has been able to initiate a number of measures to simplify processes and improve the ease of doing business in India.
The positive economic impact of government’s key initiatives would be seen, albeit with a lag, due to the relatively long gestation period. To the government’s credit, the reforms, though incremental, has been continuous, sustainable and focused towards raising the trajectory of economic growth. We expect the economy to pick up pace over the next few quarters.
What is your investment strategy in the current market scenario? Would you throw light on your asset allocation philosophy?
Indian equity markets look attractive from a long term perspective with the current valuations at reasonable levels. In the short to medium term, the direction of the market would continue to be determined by FII flows as well as key macro events shaping the country’s economic agenda.
In the current scenario, we continue to be invested in stocks that are relatively undervalued and offer strong visible earnings growth. We would evaluate stock opportunities based on growth outlook. We are positive about the Indian economy in the long term and would recommend that the policy holders stay invested over the long term for wealth creation.
As regards our asset allocation philosophy, we do not take significant cash calls in our funds. The asset allocation would be largely based on the fund objectives. We have a suitable mix of growth and value stocks in our portfolio and would look to invest in stocks that offer Growth at Reasonable Price Valuations.
Which sectors are you bullish on, at this juncture?
We currently have a barbell strategy for investments with an optimal mix of defensive and high growth sectors. We currently have a positive bias for the information technology (IT) and pharmaceuticals sectors, while remaining invested in the financials and the infrastructure sectors, which we believe should be significant drivers of the government reforms agenda.
What are the big domestic and global triggers for the markets, going forward?
Among global factors, the Indian market would be looking at the commentary from the US Federal Reserve on the imminent interest rate hikes in the US in the subsequent FOMC meets as well as a resolution to the Greek debt crisis.
The key domestic factors in the near-to-medium term include the onset and progress of the monsoon, the continued reform agenda of the government as well as the RBI's monetary policy stance. We believe that these events will shape the trajectory of the Indian equity markets.
From a fundamental standpoint, the markets would need to see the above factors resulting in better corporate earnings to resume the next big leg up.
The equity markets have corrected in this financial year. How do valuations look at these levels and what are the returns that you expect over the next 6 – 12 months?
By now, it is well understood that FY15 was a year of outsized returns for the Indian equity market with the Benchmark indices S&P BSE Sensex and CNX Nifty surging 24.89% and 26.65%, respectively. The CNX Midcap index performed even better. This rise in the equity markets during the last financial year was largely a one way movement with no meaningful correction. Since then, the equity markets have corrected sharply.
The recent weakness is broadly a reflection of weak corporate earnings, surge in international crude oil prices albeit from low levels, uncertainty over the passage of key legislations such as land acquisition and the GST bill as well as expectations of a weak monsoon from the Indian Metrological Department (IMD). These headwinds could not be offset by the improving macro situation signalled by factors such as lower inflation.
All things considered, we believe that the equity markets continue to offer the comfort of reasonable valuations for a long-term investor with a three – five year view. Given this backdrop, it would be prudent for investors to temper their return expectation this fiscal as compared to the last fiscal and stay invested as the building blocks of a multi- year bull market are intact.
The corporate earnings have been disappointing and there have been earnings downgrades for FY15 and FY16. By when do you see a revival in corporate earnings in India?
In the medium-term, Indian economy is poised for a prolonged period of sustained growth recovery accompanied by low and stable inflation. This provides a backdrop for the interest rates to nudge down further in response to the government’s supply-side reforms led by a meaningful rise in infrastructure spending.
We believe that higher GDP growth trajectory, lower inflation, muted commodity prices feeding into lower input costs, lower interest rates and government's determined effort to deliver reforms are key catalysts for improving corporate earnings over the next few quarters. While the growth in earnings in the immediate quarters may remain muted, we see the earnings growing at 16-18% CAGR over the next two years.
The government has been trying to hasten the reform process and turn around the economy. Are these efforts bearing fruit and how long will it take for economy to pick pace?
The government has been able to secure the passage of far reaching of key economic bills pertaining to insurance, coal and mineral sector. The landmark legislations will facilitate more investments in these large sectors of the economy in the medium-term. In addition, the government has been able to initiate a number of measures to simplify processes and improve the ease of doing business in India.
The positive economic impact of government’s key initiatives would be seen, albeit with a lag, due to the relatively long gestation period. To the government’s credit, the reforms, though incremental, has been continuous, sustainable and focused towards raising the trajectory of economic growth. We expect the economy to pick up pace over the next few quarters.
What is your investment strategy in the current market scenario? Would you throw light on your asset allocation philosophy?
Indian equity markets look attractive from a long term perspective with the current valuations at reasonable levels. In the short to medium term, the direction of the market would continue to be determined by FII flows as well as key macro events shaping the country’s economic agenda.
In the current scenario, we continue to be invested in stocks that are relatively undervalued and offer strong visible earnings growth. We would evaluate stock opportunities based on growth outlook. We are positive about the Indian economy in the long term and would recommend that the policy holders stay invested over the long term for wealth creation.
As regards our asset allocation philosophy, we do not take significant cash calls in our funds. The asset allocation would be largely based on the fund objectives. We have a suitable mix of growth and value stocks in our portfolio and would look to invest in stocks that offer Growth at Reasonable Price Valuations.
Which sectors are you bullish on, at this juncture?
We currently have a barbell strategy for investments with an optimal mix of defensive and high growth sectors. We currently have a positive bias for the information technology (IT) and pharmaceuticals sectors, while remaining invested in the financials and the infrastructure sectors, which we believe should be significant drivers of the government reforms agenda.
What are the big domestic and global triggers for the markets, going forward?
Among global factors, the Indian market would be looking at the commentary from the US Federal Reserve on the imminent interest rate hikes in the US in the subsequent FOMC meets as well as a resolution to the Greek debt crisis.
The key domestic factors in the near-to-medium term include the onset and progress of the monsoon, the continued reform agenda of the government as well as the RBI's monetary policy stance. We believe that these events will shape the trajectory of the Indian equity markets.
From a fundamental standpoint, the markets would need to see the above factors resulting in better corporate earnings to resume the next big leg up.