Equity markets would react more to earnings over next two quarters

2017 was a terrific year for equity investors. Do you expect the bull market to continue in 2018? What are some of the factors that will drive the market forward in 2018?

We expect 2018 to be another year of positive returns for Indian equities albeit a more volatile one. However, investors would need to tone down their return expectations. We expect the growth to bounce back from GST led disruptions to 7%+ trajectory over next 12-18 months. Earnings are also expected to bounce back sharply to mid-teens over same period. Key risks would be Oil, Geo politics, Monsoons, Union-Budget & State elections which may trigger bouts of volatility in the market for short term.

Many are expecting the FY 2018 – 2019 budget to be a populist one, given the upcoming state elections and the LokSabha elections in 2019. The Government has maintained tight fiscal discipline since it came to power. Do you expect to see fiscal loosening in this Budget? What are some fiscal measures that you want the finance minister to announce in this Budget?

While budget is expected to be rural & agri focused, we do not expect it to be a rank populist one. Even if the government announces a fiscal deficit target of 3.2% for FY19, it should not be taken negatively as the source deficit is not likely to be a populist scheme, rather Government revenues may not have stabilized till then after GST implementation, which is structural reform and international experience suggests it usually takes 18-24 months for things to stabilize.

Some financial institutions are expecting 3 to 4 Fed rate hikes this year. What is your interest rate outlook for India in 2018? The Fed rate hike in December did not have any impact on Indian stocks. Please share your views on the linkage of rate hike and our stock market?

We also believe the US Fed is on track to deliver 3 rate hikes in CY18, given the strong economic data out of USA. This is going to increase the borrowing costs for foreign investors and reduce attractiveness of carry trade. This can lead to volatility in FII flows into India and resultantly volatility in the markets. In so far as interest rate outlook is concerned, it is likely to be volatile due to multitude of factors like rate hikes in international markets, FII selling, Oil, inflation environment etc. Barring a major negative surprise in any of the above, we expect 10Yr Gsec to be in a broad 7-7.5% range.

Bond yields have been rising for the past few months. However, the stock market has also been strong. How much can bond yields rise without impacting stock prices? Please share your views?

Sub 7% yields that we witnessed last year were more an aberration, infused by De-mon led liquidity flooding the markets. What we are witnessing right now is more a normalization of yields, given the inflationary expectations.Spike in yields are broadly negative for BFSI, where we are under weight, however broader markets should be fine. Equity markets would react more to earnings over next two quarters then the current spike in yields. If the corporate have enough pricing power to pass on the inflation to the consumer, markets should be fine. Problem comes when interest rates move up due to inflation but corporates do not have pricing power,and it starts affecting their earnings. Our sense is that interest rates are still not high enough to start affecting broader markets.

In the past the Foreign Institutional Investors have been the market movers in India. However, the last year or so has seen domestic flows particularly through mutual funds dominate FII flows. Is this in your opinion a fundamental shift in the structure of our market? How will this impact the market in the medium to long term? Please share your views?

FIIs are still dominant player in the Indian markets as they have 4 times stake in Indian equities vs the DIIs. However, incremental flows into DIIs have been fair robust and some estimates put that close to 1.5 lac – 2 lac crore per year for all DIIs put together. This kind of huge liquidity can easily offset any short term FII redemption flows. An SIP book swelling to Rs. 6200 crore per month, indicates that Indian investor is getting mature and sophisticated, which augurs well for India market over medium to long term.

The Nifty is trading near all time high valuations. So far investors have been quite patient with earnings growth. What is your earnings growth outlook for 2018?

We expect earnings to bounce back sharply in H2FY18 to bounce back to mid – teens. For FY19 we expect earnings growth of 12-15% against Bloomberg consensus of 25% growth, which is still pretty healthy considering that we are coming out of a period of virtually no earnings growth for last five years

What is your investment strategy for Indiabulls Bluechip Fund?

We follow a combination of top down and bottom up strategies. Idea is to be conservative in the portfolio construction process. First we look to identitfy key themes to play by analysing global macro environment, Indian macros, government policies and other economic factors. Once the key themes are identified, we look companies that are near monopolies or oligopolies, having pricing power, strong brands, leaders/challengers in their respective sectors, strong distribution franchise, low leverage, decent growth prospects, decent RoE&RoCE and high quality management teams and low leverage. Currently, the portfolio is built predominantly around domestic consumption and government spending themes.

Your fund is overweight on sectors like Energy, Automobiles and Construction relative to Nifty, and underweight on Financials, FMCG and Technology. Bank Nifty has given more than 40% return in the last one year; it is understandable why you want to be cautious (on a relative basis versus the index). But sectors like Oil & Gas and Automobiles have given nearly 30% returns in the last one year. Please share your views on some of the sectors that you are overweight on. Also, given high valuations, do you expect to see attractive investment opportunities in the Bluechip universe (Nifty companies)?

Blue chip fund has a mandate to deploy 80% in large caps, basically top 100 companies by markets cap and upto 20% mid & small cap space. We believe still there are enough opportunities both large cap and mid cap space in the market to enable us to generate alpha. We continue to be positive on Oil & Gas, Autos and FMCG & construction and allied sectors as earnings momentum is expected to be fairly strong in this space over next few quarters.

Over the past one year or so, we are seeing quite a few financial advisors and certified financial planners advising asset allocation strategies to their clients. There can be multiple views on this topic. Some think that a goal based asset allocation strategy is simple and most effective, while others recommend a market (P/E, P/BV etc) based asset allocation strategy. As an investment expert, please share your views on this, for the benefit of retail investors among Advisorkhoj.com readers?

Goal based asset allocations are definitely a superior strategy then market timing based. If someone has an investment horizon of less than a year, no matter what is the level of P/E, P/BV, we simply cannot recommend equity. Likewise for a long term investor say 10 years or more market valuations would not be that important, perhaps what would be more important would be his risk tolerance.

Equity fund investors got fantastic returns in the last 12 months. IndiabullsBluechip Fund gave nearly 32% returns. What is your advice to retail investors who want to invest for medium to long term (3 years or longer)?

India is one of the best placed among large economies in the world in terms of demographics, demand, growth potential etc. Outlook for Indian economy and equities looks very promising over medium to long term. With India expected to be a $5 trillion economy by 2025, equity markets would be a big beneficiary. Favourable demographics, huge aspirational consumption demand, Government policies like Housing for All, 24*7 Power for All, focus on infrastructure and rural economy, resets like DeMon& GST, measures to improve ease of doing business, liberalized FDI policies can catalyze strong and stable economic growth for a long period of time. We believe India is on cusp of a structural economic upturn and equities are likely to remain the best asset class from a 3 to 5 years perspective.

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