‘Outlook On Earnings Is Bright’

Q: In a word, are you bullish, bearish or neutral on Indian equities at this time? What key trends do you see playing out over the next 12 months?
Bullish on three-year basis. We expect the Indian economy to recover next year due to robust global growth, fading effects of GST and demonetisation, the government moving to a stimulus approach as elections come closer, and low base of exports and capex sectors.

Q: What themes do you see reaping rewards for investors over the next five years? What is your take on IT and Pharma?
Over the medium term, we foresee a couple of themes playing out. First, we see reducing asset quality stress in the banking sector, as growth improves. Second, we expect a shift from unorganised to organised sectors across various products and services. Third, we anticipate a gradual recovery of private sector capex.

Q: What international trends are you watchful of at the moment? How do you foresee developments in the US, China and Europe impacting India in 2018?
Global growth has picked up since February 2016 with regions like US and Europe doing well. The key thing to watch out for is how long and strong this trend is, along with what level of inflation it causes. We also need to be watchful of whether China’s transition to a consumption-led economy from investment-led can happen without a macroeconomic disturbance. Third, with automation and AI picking up, it will reduce the traction of India’s people-intensive industries like software and engineering exports.

Q: The index seems to be trapped in a narrow band. Are you booking profits in any sectors or market segments at the moment?
For this calendar year, the Nifty is up almost 26 per cent and midcap index 39 per cent — so it is not unexpected that the market may take a breather at some point. Some of the stocks we own, especially in the mid- and small-cap space have gone up a lot and we have shifted a bit of weight to sectors where we see more value — such as financials, industrials and pharma.

Q: Has the bank recapitalisation move affected your investment strategy in the BFSI space for 2018?
In general, for the last year we have been bullish on large banks. The bank recapitalisation exercise is a welcome step to get a big part of the banking system on the growth path again.

Q: How do you think 2018 will be different from 2017 for the markets? Do you foresee earnings finally turning around decisively — and if they do not, do the risks of staying invested outweigh the potential rewards at this stage?
We are fairly confident that 2018 will be a good year for earnings due to strong global growth, a low base because of GST and demonetisation, latent demand of high ticket items, and capex spending due to a weak phase for last 3-4 years. However, part of the recovery is already priced into the present market valuations, and we feel that the market return in 2018 is unlikely to match 2017.

Q: What would your broad advice be at this time? Should they be overweight or underweight in equities?
We believe that the asset allocation of investors should not be a function of recent asset price movements. Hence, investors should continue with their planned long-term allocation to equities. The market is a bit stiff on valuations, but at the same time, the outlook for earnings is bright, so, there is no strong reason for changing one’s planned asset allocation to equities.