 "Akash Singhania")
How do you see the US election results impacting the Indian markets?
It might bring short-term volatility in global markets. In general, a democrat (Clinton) victory is perceived to lead to greater taxes and regulation. A republican (Trump) victory is perceived to lead to trade wars and a higher budget deficit. The former is what the markets are pricing in. In the event of a Republican victory or a split mandate, there could be a knee-jerk reaction (weakness) in the markets.
However, in either outcome, the odds of a financial stimulus in the US increase. Given weak global growth and low inflation, this would be welcomed by the equity markets. Though an outcome either way is unlikely to have a material medium to long-term impact on India, equities here might behave in line with global markets in the near term. They’d look forward to further cues like a Fed rate hike, possibility of stimulus in the US and euro zone growth & stability.
Besides this, what are the other global risks for Indian markets?
A swifter or sharper than expected hike in the US Fed rate, signs of instability in the euro zone, and slowdown in US growth, Europe or China would pose a downside risk. Any reversal of FII inflows due to global risk-off would adversely impact our markets.
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On the domestic front, what are the key positives and negatives?
The economy’s fundamentals remain strong. The financial deficit, current account deficit and inflation are in much better shape, crude (oil) prices are lower, there is continuing monetary easing and pick-up in growth. The government has continued with its reform agenda — deregulation of oil prices, passage of GST, bankruptcy code and the UDAY scheme which bodes well. What has not worked is acceleration in investment or the capex cycle. Corporate earnings growth has been tepid.
How has Q2 panned out? Will the Street’s earnings expectation be met?
The broader market is at mid-single digit (around five per cent) earnings growth for the September quarter and high teen growth (17 per cent) for the financial year. We are below the consensus and expect low double digit earnings growth (around 10 per cent) in FY17. Asset quality pressure and consequent recognition in banks, a lacklustre export environment and tepid earnings growth in IT companies are some reasons which would lead to lower profit growth. The Street will need to temper expectations.
Will the strong inflows into mutual funds continue? Are there enough opportunities for incremental flows?
Inflows are likely to continue. The diminishing attractiveness of alternative investment classes (gold and real estate), the low investment of households in financial assets, increasing awareness and expanding distribution of MF products and longer-term attractiveness of equity markets are some structural factors that would facilitate this. Incremental deployment would not be a challenge, with the increasing size and scale of the capital markets.
What are your returns expectations? Which sectors or themes could investors consider at this juncture?
In the past 15 years, earnings have grown annually at around 12 per cent. Similar growth is expected in medium to long term. In the past 10, 15, 20 and 25 years, the markets have delivered a compounded annual return of 10-18 per cent. In line with earnings growth and past history, expect 12-15 per cent (annually) in the medium to long term.
The theme investors can consider is consumption, consumer discretionary in particular. Though valuations are no longer cheap, they have a structural story in place. These companies have tailwinds like a normal monsoon, the GST Bill and pay commission expenditure. One can also play this theme indirectly through financials, which are more geared towards retail (small borrower) financing. Urban or rural finance, home and vehicle finance players will be beneficiaries.
