Markets believe the geopolitical situation will not escalate: Rana B Gupta

Both telecom and power sectors could get closer to the inflexion point in the next one year, says Manulife Asset Management MD

Geopolitical developments between India and Pakistan kept the markets on edge last week. Singapore-based Rana B Gupta, managing director, Manulife Asset Management, shares his outlook for the markets and sector preferences with Puneet Wadhwa in an interview. Edited excerpts:

How are the markets reading the geopolitical situation?

The election would inject a lot of volatility. However, we do not expect them to change the market’s course. There has been continuity in successive government’s key economic policies. Indian voters have been giving fairly decisive mandates in favour of either of the two main alliances in the last 20 years. A fractured mandate is a low probability event. That said, the markets could be sceptical if such an outcome were to happen. The geopolitical situation is a recent development. One needs to closely monitor this as the situation is fluid at the moment. We think the probability of further escalation is low. The markets, too, are working with the same base case.

Is Indian market a ‘buy on dips’ type now?

Due to its low export to GDP (gross domestic product) ratio and relatively better demographic profile, India is more of a bottom-up domestic demand driven story. Structural reforms promoting formalisation, such as the implementation of GST (goods and services tax), and the resolution of bad assets have further strengthened the story for an investor with a medium-to-long-term view. 

In the short term, growth has moderated due to teething issues whilst implementing such reforms and the tightening of global financial condition. These short-term issues, along with the rising political rhetoric around the election, have driven current underperformance. Both — the government and the Reserve Bank of India (RBI) — have responded to counter the growth moderation and global financial conditions are easing. If our base case on the election outcome and geopolitical situation is right, we see good opportunities in certain sectors. 

Which are these sectors?

Reforms implemented in the last few years throw up quite a few opportunities. First, reforms around formalisation have led to the organised sector gaining market share in certain segments like jewellery, apparels and consumer durables. Second, formalisation has led to a higher tax base and rising tax to GDP. Government spending on areas like electrification and roads has created an opportunity for sectors like electrical appliances. Third, reforms around the resolution of bad assets have led to better recoveries from non-performing loans. This has improved the balance sheet of private banks with corporate exposure. We also like health care companies with exposure to rising health care spending in India as well as other emerging markets. 

Which are the sectors you are cautious on?

Non-banking financial companies (NBFCs) are facing challenges. Not just NBFCs, we would be cautious of the sectors where NBFCs were a significant portion of incremental funding like auto and real estate. We are also cautious on capital goods given lack of private capex. Globally, there is a significant disruption in the auto sector, which makes us cautious on auto ancillaries in India. Also, China's endeavour to move to the higher value-added economy using more technology would mean China's metal intensity of growth should fall. Given China constituted 40 per cent–50 per cent of most of the metal demand makes us cautious on metals, too. 

What's your view on capex-driven/cyclical sectors?

Among cyclical sectors, we like private banks (corporate), which are coming out of slow growth and bad asset quality issues. We don't see any sustained sign of private capex pick up yet. Whilst government-driven capex has helped, there is no certainty that the current growth rate in orders would sustain. Therefore, we are cautious on capital goods.

Any contra pick?

Both the telecom and power sectors could get closer to the inflexion point in the next one year. Well-managed companies with a good balance sheet in these sectors should substantially benefit. The telecom industry, in our view, is reaching a point where revenue de-growth should stop. In an industry where debt levels are so high, a further de-growth of the industry is not sustainable. Second, power demand is growing moderately, but there is hardly any supply beyond the current pipeline. Current excess capacity should be absorbed in the next three–four years. Therefore, power plants with unutilised capacities should be able to operate at a higher utilisation in two–three years.