 "We won't over-emphasise importance of any single state election: Vetri Subramaniam")
With the outcome of the Bihar Assembly elections now known, the focus will again shift to the US Federal Reserve's stance on rates and corporate earnings growth. Vetri Subramaniam, chief investment officer, Religare Invesco Mutual Fund, tells Puneet Wadhwa a rate hike by the US Fed is unlikely to destabilise markets, as they have had time to adjust. On the domestic front, consensus earnings expectations for FY16 and FY17 are eight per cent and 17 per cent (year-on-year), respectively, he says. Edited excerpts:
Do you think the Bihar election outcome will have any material impact on the reform agenda and the policy making initiatives of the government over the next few months?
India has 29 states and in any given year, it is likely there will be four-five state elections. We would not over-emphasise the importance of any single state election.
In January-September, we saw much stronger flows into Indian debt ($8.8 billion) than into equities ($4.6 billion) from FPIs (foreign portfolio investors). This reflects the strong macro economic fundamentals in India.
Given that both nominal and real yields in India are quite attractive, we think foreign investors are likely to remain keen on Indian debt, notwithstanding a change in the Fed policy. What is even more noteworthy is that FDI (foreign direct investment) into India has been extremely strong at $31 billion in only the first six months of CY2015. From India's perspective, the rise in FDI is very welcome as these flows tend to be less sensitive to Central bank policy changes and market mood swings.
Are the global financial markets already factoring in a US Fed rate rise this year or is the worst yet to come?
If you look beyond the past month, this has been a difficult year for most equity markets. Weak global growth trends, the sell-off in commodities and a strong dollar have been among the pain points. The markets had nearly two years to reconcile to a change in stance by the US Fed. We think a US Fed hike is unlikely to destabilise markets, as they have had time to adjust.
Back home, what is your analysis of corporate earnings thus far?
We are about two-thirds of the way through the earnings' season and it has been largely in line with the subdued expectations. Revenue growth is weak but gross profit margins have moved higher and so have operating margins.
Consensus has revised down the BSE Sensex earnings growth estimates (for both F16 and F17) by 84 basis points (bps) through the earnings season. Consensus earnings expectations for FY16 and FY17 are at eight per cent and 17 per cent (year-on-year), respectively. The collapse in global commodity prices is now in the numbers, but the effect will ease by the December quarter. The challenge, however, is that domestic growth remains tepid.
Over the longer term, we recognise the potential for mean reversion in profits. Currently, a number of industries are struggling from lower capacity utilisation and high interest rates. As and when the economy moves into higher gear, there is scope for profits to recover to historical averages.
This means reversion in profits will be led largely by the cyclical sectors - such as industrials, financials, consumer discretionary and materials. Within these areas, we think consumer discretionary is best placed for a revival in growth followed by financials. Industrials will lag as the investment cycle recovery will take time. As for materials, that is dependent more on global economic cycle than the domestic cycle.
How would you deal with automobile and metal sectors?
We are overweight on the automobile sector. Besides structural factors, the sector is enjoying tailwinds from lower raw material prices, and consumers are enjoying the tailwinds from lower fuel prices and interest rates. Valuations are not cheap but appear reasonable compared to their long-term growth prospects. As for metals, the recovery is largely linked to global economic trends. Further, balance sheets in the metals sector are quite stressed, which makes stock picking very difficult though in some cases valuations have turned quite supportive.
What is the road ahead for the banking sector?
Stressed loans remain a concern for banks. There are two issues - recognition of stressed assets leading to provisioning and then eventual write-down/haircuts that will need to be taken. We remain concerned that some institutions are yet to recognise the true extent of loan write-downs, which will eventually strain their capital adequacy. We are very selective, as the outcomes have been very divergent between banks.
Do you think the Bihar election outcome will have any material impact on the reform agenda and the policy making initiatives of the government over the next few months?
India has 29 states and in any given year, it is likely there will be four-five state elections. We would not over-emphasise the importance of any single state election.
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Foreign investors have put in around $3.4 billion in the Indian capital markets in October, the highest in seven months. Do you expect this trend to continue over the next one year?
In January-September, we saw much stronger flows into Indian debt ($8.8 billion) than into equities ($4.6 billion) from FPIs (foreign portfolio investors). This reflects the strong macro economic fundamentals in India.
Given that both nominal and real yields in India are quite attractive, we think foreign investors are likely to remain keen on Indian debt, notwithstanding a change in the Fed policy. What is even more noteworthy is that FDI (foreign direct investment) into India has been extremely strong at $31 billion in only the first six months of CY2015. From India's perspective, the rise in FDI is very welcome as these flows tend to be less sensitive to Central bank policy changes and market mood swings.
Are the global financial markets already factoring in a US Fed rate rise this year or is the worst yet to come?
If you look beyond the past month, this has been a difficult year for most equity markets. Weak global growth trends, the sell-off in commodities and a strong dollar have been among the pain points. The markets had nearly two years to reconcile to a change in stance by the US Fed. We think a US Fed hike is unlikely to destabilise markets, as they have had time to adjust.
Back home, what is your analysis of corporate earnings thus far?
We are about two-thirds of the way through the earnings' season and it has been largely in line with the subdued expectations. Revenue growth is weak but gross profit margins have moved higher and so have operating margins.
Consensus has revised down the BSE Sensex earnings growth estimates (for both F16 and F17) by 84 basis points (bps) through the earnings season. Consensus earnings expectations for FY16 and FY17 are at eight per cent and 17 per cent (year-on-year), respectively. The collapse in global commodity prices is now in the numbers, but the effect will ease by the December quarter. The challenge, however, is that domestic growth remains tepid.
Over the longer term, we recognise the potential for mean reversion in profits. Currently, a number of industries are struggling from lower capacity utilisation and high interest rates. As and when the economy moves into higher gear, there is scope for profits to recover to historical averages.
This means reversion in profits will be led largely by the cyclical sectors - such as industrials, financials, consumer discretionary and materials. Within these areas, we think consumer discretionary is best placed for a revival in growth followed by financials. Industrials will lag as the investment cycle recovery will take time. As for materials, that is dependent more on global economic cycle than the domestic cycle.
How would you deal with automobile and metal sectors?
We are overweight on the automobile sector. Besides structural factors, the sector is enjoying tailwinds from lower raw material prices, and consumers are enjoying the tailwinds from lower fuel prices and interest rates. Valuations are not cheap but appear reasonable compared to their long-term growth prospects. As for metals, the recovery is largely linked to global economic trends. Further, balance sheets in the metals sector are quite stressed, which makes stock picking very difficult though in some cases valuations have turned quite supportive.
What is the road ahead for the banking sector?
Stressed loans remain a concern for banks. There are two issues - recognition of stressed assets leading to provisioning and then eventual write-down/haircuts that will need to be taken. We remain concerned that some institutions are yet to recognise the true extent of loan write-downs, which will eventually strain their capital adequacy. We are very selective, as the outcomes have been very divergent between banks.