 "Anand Shah")
The markets are expected to do well in the near term, with both consumption and investment showing signs of improvement, says Anand Shah, chief investment officer, BNP Paribas Mutual Fund, in an interview with Ashley Coutinho.
What is your outlook on the markets?
The markets are expected to do well in the near term, with both consumption and investment — the two pillars of GDP (gross domestic product) growth — showing signs of improvement. India is in a sweet spot as far as equity investment is concerned due to lower interest rates globally and India's growth potential. With increased infrastructure investment and improved consumption outlook we believe the earnings growth shall continue to improve over the next two years. Monsoon is turning out to be above normal which may boost rural economy that was suffering due to two consecutive bad monsoons. The implementation of the seventh pay commission along with its cascading impact on other sectors may drive consumption economy in some sections. On the investment side, the government is focusing on investment in road, defence and railways.
Are valuations stretched at this point?
Valuations are at the higher end of historical average across most sectors and are expected to stay ahead of earning upgrades. Since the recovery is heterogeneous in nature we expect various segments and sub-segments of the economy to perform much better than the wider market.
What are the risks of a global risk-off trade?
The global cues to watch out for are the US Fed rate hike, the impact of Brexit and the consumption demand in China. India is better placed among emerging countries and the impact of these risks may be limited.
Domestic inflows have slowed down a bit. Do you expect money to continue to come into equity mutual funds?
Over the last few years, high inflation had led domestic investors to favour physical assets such as property and gold. With real rates turning positive and inflation under control, financial assets have regained their attractiveness, while physical assets have lost some of their appeal. The property market has been under pressure from slowing price appreciation and weakening demand, while average gold prices have fallen by 12 per cent from their FY2013 average. Even after the strong inflows from domestic investors over the last 18 months, equities still represent less than 3 per cent of Indian household's total assets. Assuming 5 per cent of households' incremental savings comes to equities — as was the case over FY2005-2009, total retail equity inflows could reach $20 billion a year to strongly support the Indian equity market.
What are the key takeaways from the June quarter earnings?
Company results announced so far reflect net profits ahead of expectations helped by lower selling, general and administrative (SG&A) expenses, inventory gains, lower finance costs, less depreciation and extraordinary gains. The earnings trend has been broadly in line. Volume growth has disappointed, mainly in the cement and consumer staples sectors. Weak rural demand on the back of poor monsoons in the past two summers could have hit volumes. It is expected that the growth will revive from the second half of FY17 to about 15 per cent year-on-year.
Which sectors are you betting on?
We remain positive on private sector banks/retail NBFCs (non-banking financial companies), cement, consumer discretionary and other bottom-up stock picks. Cement companies are expected to benefit from infrastructure spend and improving rural demand. Sector consolidation and data usage growth are the key anchors in the telecom sector. Apart from this, we have various bottom-up stock picks in logistics, airline, media space and others.
