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Growth concerns regarding China resurfaced last week and took a toll on global financial markets. Anup Maheshwari, executive vice-president, head of equities & corporate strategy, DSP BlackRock, tells Puneet Wadhwa that India remains a preferred investment destination. Risks around China, the US Federal Reserve and the euro zone are factored in by equity markets to a large extent, he says. Edited excerpts:
How much of event-based risks (China, euro zone, hike in US interest rates) are the markets factoring in? How does India look as an investment destination now?
From being called one of the fragile five economies in 2013, India has emerged as one of the strongest among the emerging markets (EMs) over 2014 and 2015. A reform-oriented government, along with improving macro (current account deficit, fiscal deficit, currency and industrial production) bodes well for the economy at large.
We continue to believe India will remain a preferred investment destination as the economy starts bearing the fruit of all the steps taken by the Narendra Modi government over 15 months. Risks around China, the US Federal Reserve (US Fed) and euro zone are factored in equity markets to a large extent. However, we will continue to see some volatility at regular intervals, which we would use as an opportunity to add to Indian equities.
What's the best and worst we can see on the markets over the next six to 12 months?
We ain't commenting on the absolute levels of the markets but we do believe India is in a sweet spot and the best is yet to come for equity markets. Steps taken by the Modi government are, to a certain extent, under-appreciated by the market. Favourable government policies, falling inflation and the sharp decline in oil prices will provide much needed flexibility to the Reserve Bank of India (RBI) to continue a rate declining cycle. The sharp increase in indirect taxes (in the April to July period) will further strengthen the government's ability to increase spending (capital expenditure) without putting a strain on the fiscal deficit.
Do you think the rupee could play a spoilsport for markets and companies at a time when there is hardly any pick-up in the earnings?
No. We believe RBI will intervene in the forex market at an appropriate time. Despite its recent decline in the currency, the rupee continues to be one of the strongest performing currencies (from the lows in September 2013) not only among EMs but among developed markets as well. The focus of RBI has been to keep the currency stable and they have been able to do so quite successfully.
The rupee's recent decline versus the dollar was mainly triggered by the China devaluation and the rupee is marginally above its fair value. We believe corporate earnings will see a pick-up in the second half of the financial year, driven by a higher capital expenditure by the government.
The monsoon session of Parliament has been a washout. Are the markets factoring in further delays in passage of key economic legislations, especially with the Bihar elections round the corner?
Despite the Parliament logjam, the government continues to focus on addressing key issues that are restricting economic growth. After addressing the issues related to coal availability and power generation earlier in the year, the government has turned the focus on public sector bank re-capitalisation, which bodes well for the sector and the economy at large.
Is the mid- and small-cap rally sustainable and can you still spot any multi-baggers in the making?
After significantly outperforming the large-caps in 2014 and 2015 YTD (year-to-date), mid- and small-caps are trading at a slight premium to large-caps, compared to history. While there could certainly be some volatility in the near term due to this premium valuation, we believe small- and mid-caps have a potential to outperform large-caps in an upward trending market not only in terms of price performance, but return on equity and earnings growth as well.
What are your sectoral preferences?
We continue to remain constructive on automobile, financials, select industrials, downstream energy and gas utilities. We continue to remain constructive on private sector banks and select state-owned banks. Brent crude oil prices continue to decline (17 per cent in July) which bodes well for oil marketing companies (OMCs) and the Indian economy at large, being a net importer of crude oil. OMCs are now free to price both petrol and diesel at market rates which will improve profitability. The shift from IT (information technology) and health care is mainly to fund the interest rate-sensitive and cyclical sectors. We remain cautious on the commodity space.
Banking sector has been in the news recently. Does it make a strong case for investing in this space from a medium-to-long term perspective?
The recent announcements by the Government related to state owned banks is certainly a step in the right direction. The additional capital will not only help the banks to provide for (to an extent) the NPLs, but will also allow the banks to use this capital for growth. The appointment of experienced and well regarded individuals as CEOs and Chairmen also demonstrates the commitment of the Government to improve the quality of top management at these institutions. We believe these initiatives will help in the medium-to-long term, although the near-term outlook remains contingent on the economic revival.
Do you expect the Reserve Bank of India (RBI) to slash rates given the macro data and yuan’s devaluation?
Yes. We believe there is more room to cut policy rates given the consistent decline in inflation, both CPI and WPI. The government policies have also played a role to contain inflation which should provide the comfort to the RBI governor to continue the monetary easing cycle.
