 "Fall in commodity prices to impact Q2FY16 earnings: Mihir Vora")
Mihir Vora, Director & Chief Investment Officer, Max Life Insurance expects the 2016 to be a decent year for equities and fixed income markets. However, he believes that the key risks to the market are global, especially the trend in Chinese growth and currency. He advises investors to buy good quality stocks with visible growth triggers, at a reasonable price. Edited excerpts of an interview with Surabhi Roy:
After witnessing a surge of 31.4% in the year 2014, Nifty50 took a breather last year with a fall of 4.1%. How do you see the markets panning out in the year 2016 and key levels to watch out for?
2015 had a high base to start from – The Nifty returns in 2012, 2013 and 2014 were 28%, 7% and 31%, respectively and investor expectations were running high in the beginning of 2015 due to the previous three-year performance. The formation of a new government in 2014 and the hope of accelerated reforms also kept market sentiment positive. However, due to many local and global factors, markets didn’t perform after starting on a positive note.
Foreign flows turned negative in the second half though domestic flows remained robust. While India went down a bit, we outperformed the emerging market indices. Moreover, the small and mid-cap indices have given positive returns. The Indian Rupee also was amongst the best performing emerging market currencies. Given these facts and the backdrop, the performance does not look that bad.
Unlike 2015, 2016 starts with no euphoria and expectations are very realistic. Earnings estimates will also start from the low base of 2015 e.g. the first quarter of 2015 saw negative earnings growth on overall basis. The sectors where there could be further pressure on earnings are oil & gas and metals. Consensus earnings growth for next year is about 14% and valuations are at long-term averages.
Hence, 2016 should be a decent year for equities and fixed income markets. The key risks to the market are global, especially the trend in Chinese growth and currency.
How do you see Indian markets placed compared to other emerging market peers for calendar year 2016?
Fundamentally, in a world exhibiting weak growth, India is an exception. The commodity price crash has delivered a positive terms-of-trade shock. The average oil price this year is $30 less than the price last year. This means a benefit of Rs 1,50,000-2,00,000 crore on the trade deficit because of reduction in the oil import bill.
Similarly, gold prices are also down. These will benefit in terms of lower inflation, lower trade deficit, lower fiscal deficit, lower interest rates and improved consumption spend. There is a good chance that India may end up with only a small current account deficit and a balance of payment surplus. This should support the equity, currency and fixed income markets in the medium term.
The situation in most leading emerging markets is diametrically opposite. Brazil, Russia, South Africa, Indonesia, Middle East etc. have significant dependence on commodity exports. The commodity crash has dramatically reduced export revenues and has created stress in the fiscal deficits and currency for these regions. While China benefits from lower oil prices, the slowdown seems to be structural and may last for a while.
Thus, India is amongst the few countries where growth can potentially move up and interest rates can move down – making it a good investment story for the global investor. Of course in the case of global volatility, India may not be insulated in the short-term but the structural case is sound provided we do a few things right on the policy front and in execution of plans.
We are thus positive on equities and fixed income asset classes in India. Commodities and real estate, especially residential real estate will continue to underperform.
FIIs invested nearly $3 billion in 2015 against whopping $16 billion in 2014. How do you see the trend of foreign fund inflows in 2016?
2015 saw the emergence of local institutions as significant buyers in the markets, especially the mutual funds. In 2014, foreign buyers bought $16 billion while DIIs sold $5 billion. In 2015, both were buyers with DIIs buying $10 billion, however FII buying was much smaller compared to historical trends. Thus the market is likely to be supported by both local and foreign investors.
Foreign investors have been net buyers of equities in 13 out of the last 15 years. US growth is sanguine and Europe seems to be stable. China seems to be the only question mark as far a growth is concerned. Barring a big depreciation in the Chinese currency or any other such global surprise, we expect foreign investors to continue investing at the rate of $10-20 billion per year in listed equities.
Private Equity and FDI flows will be in addition to these flows. With other significant asset classes like real estate and gold no longer giving high returns, we expect continued inflows into equities and fixed income assets by local investors.
The other significant flow from foreign investors that India receives is in fixed income. With the RBI opening up limits for foreigners over the past few years, this section has become significant. 2014 saw a massive $26 billion in fixed income flows and 2015 saw $8 billon. In both these years, the fixed income flows dwarfed the equity flows. This reinforces the fact that India is an attractive investment destination for foreigners.
What are your expectations for December quarter for Sensex companies? How do valuations look at these levels and what are the returns that you expect over the next 6–12 months?
We expect muted growth in the December quarter for Sensex companies. While earnings growth in the corresponding quarter in the previous year was negative (thus providing a favourable base), the further drop in commodity (oil, metal etc.) prices would drag down earnings for companies in these sectors.
However, in the subsequent quarters the low base would pan out and we expect 14% earnings growth in the next year. With a P/E ratio of 15 on forward earnings, we expect 15% returns from equities in the next year. Moreover, if one were to look at history, there are not many instances of the Nifty delivering negative returns two years in a row.
The rupee fell for the fifth straight year amid global turmoil and strengthening of the US dollar. What is your outlook on rupee?
The outlook for the Indian Rupee depends not only on the fundamentals of the Indian economy but also on how the US dollar moves versus the rest of the emerging market currencies (especially Chinese Yuan) and Euro/Yen. In fact, the Indian Rupee has been amongst the best performing currency amongst emerging markets and has also outperformed the Euro in 2015.
The fundamentals are vastly improved compared to 2013. Forex reserves are at all-time high and India is likely to run a balance-of-payments surplus this year. As of now, the markets have factored in the first rate hike by the US Federal Reserve. However, since future rates hikes are likely be gradual, the US Dollar is unlikely to continue to appreciate at the rate at which we saw in the past few months.
We do not expect a sharp fall for the rupee. However, given the inflation differentials, a 3-5% depreciation of the Rupee versus the US Dollar could be termed as an orderly depreciation. Thus the range of 68-70 in the next 12 months should not be considered as unusual.
Indian IPOs surged more than nine-fold in 2015 and raised 138.62 billion rupees ($2.09 billion) via IPOs in 2015, the highest since 2010. What is your overall view on the IPO market and advice to investors from an investment perspective?
While the IPOs were $2 billon worth, the total placements in bulk offerings by public sector and private listed companies including offer-for-sale, QIP etc. were another $15 billion. Thus a significant amount of supply has been absorbed in the market in 2015. There are many good companies in the unlisted space which are in the pipeline in the coming year.
The key to any good investment is in the entry price – our advice to investors is to look at each IPO on an individual basis rather than dabbling in every offering without consideration of fundamentals. We hope that companies and investment banks do IPOs at valuations which leave some upside for the investors, for a pleasant experience.
Should one look at the mid-cap segment at the current levels with the index near its all time high of 11,666 levels? Are there any sectors that are worth investing at the current levels?
Mid-caps and small-caps consist of a large pool of companies to choose from – literally hundreds of companies. So, while the mid-cap index has moved up, there are many stocks which still offer value. The mid and small cap segment will also benefit from the easing interest rate cycle. A significant portion of the bottom line has been eaten away in the past few years by rising leverage and rates.
As rates move down, the benefits will flow straight to the bottom-line. This coupled with operating leverage in a growth environment can have a doubly-beneficial impact on the profit growth. Moreover, mid and small caps also represent newly emerging sectors- this is a dynamic process and in a growth economy like India, these opportunities will keep appearing continuously.
In equities, our investment philosophy is to buy good quality stocks with visible growth triggers, at a reasonable price. We are positive on industrials especially non-leveraged construction companies, private-sector banks / finance companies and auto / auto-part manufacturers.
We have identified sectors which are likely to be growth leaders e.g. road-building, railway, defense, mining equipment etc. and have focused on these segments of the market. We are underweight on metals, utilities, consumer staples and telecom sectors.
