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Is this year’s rally in Indian shares shallow or having substance?
It’s definitely a strong rally, which will continue. The economic cycle is turning and we are at the bottom. Inflation is under check; the commodities cycle has peaked and governments have been trying to revive the investment cycle for the past three years. A lot of investments had happened, but these had never taken off. So, the money was stuck. The government is in the process of unlocking that. We might be at the last mile of that. Once that happens, output in the economy will increase. Unproductive investments will turn productive, the best outcome one can have.
Can India continue to have higher allocation of global funds next year?
The share of global investments in India will rise disproportionately. We have three per cent of our gross domestic product (GDP) in oil imports. As oil prices have dipped 40 per cent, we will save one per cent of GDP. Amid this, many countries are likely to go out of investors’ radar and their investments in India will go up. The domestic share, too, is rising. Even if there are withdrawals because of risk aversion, we will be resilient because domestic money will keep supporting the market.
How are you positioned to reap the benefits?
We are overweight on cyclical stocks for about a year. While the stocks have run up a lot, we feel there are many more triggers ahead. We are bullish on financials, the best sector to play the domestic economy recovery. Capital goods and consumer discretionary are the other two sectors we are overweight on. These will benefit from improving margins, as commodity prices are down and interest rates are likely to fall.
Capital goods stocks have underperformed the market. What do you think about this segment?
Capital goods stocks had a bear market for many years. That is one segment which has to revive to see a revival in GDP growth. One must have these stocks; these have the best reward-to-risk ratio. Typically, the outlook is we want to play the next three-five years, rather than play the next three-six months. That’s why we hold these stocks. These will have a number of triggers — commissioning of projects, visibility of new orders, interest rate cuts and an improvement in margins with commodity prices falling. All these will lead to improvement in the sector’s valuation.
What is your view on public sector banks?
We have a combination of private, and public sector banks. We feel an economic recovery will help alleviate concerns about non-performing assets (NPAs). A lot of loans are to stuck projects; that’s a focus area for the government. Further, a general economic recovery will ensure NPAs are no longer worrisome. The extent of the problem is very high; that’s why the stocks are cheap. But going forward, we do not expect the same extent of the problem. So, these banks will also participate in the growth.
Do you agree with some who say the indices might double in the next four-five years?
It’s impossible to project, because there are many variables. There will be volatility, as several factors will be impacting global equities. But largely, equities will deliver better returns than other asset classes. Projections are to anchor some expectations, but we can never get it right. Historically, markets have grown 15-20 per cent. So, if things were to go in a similar manner, these projections could be possible. But the bottom line is an investor is better off in equities than in other asset classes.
Pharmaceuticals and information technology (IT) have been among your top picks in the past. Has the stand changed?
We are underweight on pharma and IT. Since we are playing the domestic economic cycle, our top bets are cyclicals. We do own IT stocks, but these will have their share of problems with a change in the value of the currency. The rupee has appreciated against the euro and 35 per cent of IT sales tend to come from Europe. So, there will be some challenges for IT companies in the coming quarters.
How do you see earnings growth panning out in the coming years?
In the past five years, earnings grew about eight per cent. This year, they might grow 10-12 per cent. Going forward, we should see growth of 15-20 per cent, as margins pick up. Markets will steadily go towards a price-to-earnings ratio of 20.
How will fall in crude prices affect India?
It’s a bonanza for India. We spend $100 billion annually on crude oil imports. Now, that amount will fall to about $70 billion. India will save about $30 billion, on an average. The current fall in crude prices is on the back of a supply factor. In 2008, it was a demand collapse that brought crude down and economies across the globe suffered. This time, it is supply-driven. It is a transfer of demand from oil-producing countries to oil-consuming countries. Of course, the global economy is slow. Our exports might not be as great, but these account for 25 per cent of our economy; the rest is domestic-driven. That’s where the strength of our economy lies.
What could the challenges be?
Global demand is not as good as it appears. While the US is doing well, there are challenges for China, Japan and Europe, which are continuing with monetary stimulus. The world has been trying to stimulate, but this has not worked. We are in the sixth year of a recovery. So, it’s a structural challenge. Therefore, it is a challenge for India to the extent that our companies have globalised. They will face challenges on the export front.
