Rupee fall a boon for IT and pharma stocks, says Saurabh Mukherjea

The sharp slide in the rupee will benefit stocks in export-oriented sectors such as information technology (IT) and pharmaceuticals, said Saurabh Mukherjea, founder of Marcellus Investment Managers. In an interview with Samie Modak during the CFA Society India’s third India Wealth Management conference, Mukherjea explains why the markets are set for an interesting nine months. Edited excerpts:

India has outperformed the MSCI Emerging Market (EM) this year by a huge margin. What are the reasons for this?

Emerging markets, such as Brazil, Russia and South Africa, which are commodity exporters, and those running large Budget deficits, such as Turkey, have been punished during this dollar rally. 

India, on the other hand, is a dollar exporter and while fiscal deficit is rising, three years of relatively low oil prices have left the country in a more secure fiscal position than most other EMs.

The markets have rewarded good companies where they see growth potential, while most others have been punished. Where do you see good opportunities? How should the investment approach be?

In general, the Indian market has consistently rewarded clean, well-managed companies with healthy cash flows. Stocks like Asian Paints, HDFC Bank, Berger Paints and Marico have given more than 200 times returns over the past 20 years. More specifically, at the current juncture, with the rupee is sliding sharply after a gap of almost five years, export-oriented sectors like IT, pharma and a section of the auto sector are well placed to benefit.

What are some of the headwinds and tailwinds to watch out for in the near-term? 

The cost of money is rising globally as the US Federal Reserve continues to tighten monetary policy. 

This is likely to act as a drag on the equity prices globally. Parallely, the escalating trade war between major global economies is creating rising inflationary risk, as countries substitute lower-priced imports with higher priced domestic products. This, in turn, creates the risk of an upside surprise in inflation which in turn might lead to the Fed tightening monetary policy further. Closer home, we have our own inflationary pressures to contend with as the government steps up pre-election spending on the poor, usually a sure-fire way to stoke consumer inflation. 

And then, there are the elections – I reckon the assembly elections in November and December this year are just as important as the general elections next year.

Will overseas investor flows continue to remain tepid given changes to global monetary policies?

Unless valuations correct, foreign portfolio investors (FPIs) are unlikely to invest in Indian equities. 

If the valuations correct, FPIs will enthusiastically buy quality Indian stocks.

Do you see value emerging in the mid-cap and small-cap space after the recent correction? Is there scope for valuation premium of large caps to narrow further? 

In a rising interest rate, rising inflation climate small-mid caps tend to be more vulnerable than large caps. These firms have less pricing power, and hence, profit margins are usually more vulnerable to compression in a rising inflation climate. 

I strongly expect the balance of forces to favour large-caps.