Kaushik Dani, head of equity funds, Peerless Mutual Fund in an interview with Puneet Wadhwa shares his views on how the markets are likley to pan out in an election environment.
It has been a topsy-turvy 2013 for the global equity markets and 2014, till now, has also been quite volatile. How do you see the rest of the year shaping up and what are the key variables that will influence how the markets pan out?
Unlike Indian markets, 2013 was a good year for global equity markets. Developed markets, especially Japanese, US and European equity markets performed well. Indian equity markets ended the calendar year with single digit returns.
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Indian markets also have to face the domestic issues of lower growth and high inflation. Sticky inflation has led to elevated interest rates, which ultimately is hindering growth. However, the good news is in form of lower deficit and stable currency.
Over past few months, various steps have been initiated by the central bank which would act as a buffer against probable taper crisis. With current year also being an election year for India, most of the market performance is expected to come in the second half.
Apart from Elections, the extent and pace of economic reforms would be a key variable to watch for. Improvement in industrial and overall growth, on the back of manageable inflation should set the trend for Indian equity markets going forward.
How much of an impact will the QE (quantitative easing) taper and the developments in the Euro-zone are likely to have on the markets over the next few years or is the worst already factored in?
The good thing about QE taper is that markets have been expecting this for many months now. So, it has given enough time to emerging markets to tweak their strategies and prevent any possible adverse situation. However, one also has to accept the fact that global liquidity comes down and easy money into risky assets would be a phenomenon of past. So one can say that the worst is factored with regards to tapering, which happens in sync with the improvement of US economy.
However, now on emerging markets would have to perform on their individual merits rather than easy liquidity. With Europe recovering faster than expectations, fundamentals of emerging economies will have to compete more aggressively for their share in global flows.
At the domestic level, the markets, it seems, have been quite wary of the upcoming General Elections. Do you think that they have factored in a fractured mandate?
It’s nothing unusual for nervousness creeping into the markets around the General Elections. Though the importance of elections usually gets marginalized over a longer time frame, investors tend to be uncommitted during that period.
For a diversified and large nation like India, a coalition would be no great surprise. However, the larger issue with fractured mandate is that sometimes policy reforms take a back seat and that does not augur well for the nation.
Assuming that there is a stable government at the Centre for the next five years, where do you see the markets over this period? What’s the worst case scenario? Can you give Sensex and Nifty targets (broad range)?
A stable or a majority led government can work wonders for the equity markets. This is because the pace of reforms would be faster; kick-starting the investments and capex cycle. The same could lead to revival of economy and bring the nation back to higher levels of growth that we had seen in the past. Indian equity markets over longer time frame have been successful in giving double digit returns and the same can be expected over next five years.
Markets could face some tough times if the domestic economy fails to take off or if there is a global sell-off. Otherwise, India still remains a preferred destination as compared to many other emerging markets.
What is your call looking at the currency aspect, do you think it is because the Indian macro situation is much better or is there anything else playing out?
Movements in currency can be related to internal as well as external factors. Weak macros like high trade deficit, higher imports and inflation can weaken the domestic currency. Global sell-offs and exodus of foreign investors can also impact the currency movements. A fresh initiative by the central bank to shore up the foreign reserves has definitely led to stable currency. This coupled with improvement in trade data has also benefited the Rupee. Sustained increase in exports and lower precious metal imports can lead to further improvement and keep the currency stable.
If one was to invest right now with a five year horizon, which sectors would you recommend for investment and what is the return (please indicate a broad range) one can expect?
Over a five year horizon, we are expected to show higher growth rates. Sectors like Financials and Energy are backbone to the growth and thus one needs to have them in long-term portfolio. Better rural penetration and increasing levels of disposable income can continue to lead wealth creation in sectors like Automobiles and FMCG (fast moving consumer goods) over long-term.
With global recovery also being seen, one must not forget sectors like Technology and Pharmaceuticals which are expected to show sustainable performance. A portfolio constructed with above mentioned sectors can possibly beat market returns and also generate double digit returns over the long-run.