Gold Silver Reports — Valuations Not Cheap, But You can Still Make Money — Flows into Indian equities are likely to remain strong as progress on re forms and expectations of better earnings will continue to drive senti ment, said Rana Gupta, managing director, Indian Equities at Manulife Asset Management. In an interview to Sanam Mirchandani, Singaporebased Gupta said he is bullish on consumer, consumer finance, building materials, hospitals and diagnostic services companies. Edited excerpts:
Do you see any lasting impact on Indian markets after the country’s surgical strikes against Pakistan?
While in short term it creates some uncertainty, looking at the statement issued by both sides, we believe the situation may not escalate uncontrollably.
Is Indian market valuation stretched?
We are convinced on the growth and so, we are quite comfortable with the valuations. There is a lot of uncertainty and question on growth in the world. India is one place where you get decent amount of growth. It is not surprising that people are paying up for that. The earnings growth has not been encouraging, but now we believe that the adjustment process is behind us. Going forward, we will have a scenario where the micro and the macro both cylinders will fire.
What are the investment themes you are betting on?
We are bullish on consumer and consumer finance stocks. Also, within consumer, we prefer more discretionary goods than staples. In consumer discretionary space, we like auto, white goods and media space.Valuations are not cheap but not very expensive that you cannot make money from here. Building materials is a space we like whether it is cements, paints or electrical appliances. IT sector is going through a churn because of cloud and other new technologies. This can cause deflation in IT spending. It will take them a year or so to get adapted to the new normal and growth rates can indeed come down. We are negative on large cap pharma, particularly, where the base business in the US is very large. They will find it very difficult to grow because in generic pricing there is a lot of pressure. Small cap pharma companies, where the base business in the US is quite small and the pipeline is good, they can still grow. Within health care, we no longer want to play US generics but play the theme of improving healthcare spending in India and other emerging markets. We are also focusing on hospitals and diagnostic services. Diagnostic companies can easily grow at 15-17% over the next few years provided there is strong execution.
What do you make of the policy decisions of the US Federal Reserve and Bank of Japan (BOJ)?
Whether the US Fed raises rates during 2016 or not will depend on economic and political outcomes from here till December. US Fed is the only major central banker talking about tightening. As a result, US dollar may remain well bid against other G3 currencies. That itself is deflationary for the US. Wage growth in the US has also been slow. As a result, CPI (consumer price index) is below US Fed’s target of 2%. Our view of gradual and data dependent rate hike does not change. Our base case is for one rate hike in second quarter of 2017. On BOJ, we think by committing to keep 10-Year yield at or around 0%, it has paved the way for more bond issuance from the government.
Some sections of the market have questioned India’s GDP (gross domestic product) growth estimates.What is your perception?
As long as the growth is stable and a respectable number, whether it is 7% or 7.5% it does not matter. In the new series, we look at the GVA (gross value added) number and as long as it is more than 7%, we are happy. That meets out criteria of a stable, respectable growth.
What is your expectation on earnings growth in FY17?
There could still be some downgrades for FY17 but major downgrades are clearly behind us. About 1-2% more downgrade in earnings if possible. In FY18, earnings base is very benign and so, they can surprise positively. Even with a bit of turn in cycle, earnings will grow quite strongly.
What is the perception on reforms among FIIs (foreign institutional investor) after GST?
The current policy makers are less about ad hoc policies discretion but more about putting strong processes and structures in place. Due to the RBI’s (Reserve Bank of India) inflation targeting regime, we feel very confident that they will protect the value of the currency and Urjit Patel’s appointment offers comfort of continuity. GST (goods and services tax) will make India one market and the ease of doing business will improve and the tax net will become wider, but you have to give it three-five years. In the very short term, it can have some small negative costs for the consumer but it depends on the rate of GST. After GST, as of now, there is nothing on my wish list for reforms. The next two-three years will be about execution and reaping benefits.
There is a perception that India is being viewed separately from emerging markets basket.
The trend started since crude prices started tumbling and global growth uncertainty started hurting exports from emerging markets. For India, exports as a percentage of GDP, is already quite low at 15%. India also gains a lot from falling crude prices because it is a large importer of crude. The government has used this fall judiciously to improve infrastructure. With financial inclusion, people will have better and cheaper access to formal credit. Because of those reasons, investors are willing to look at India differently, away from the emerging market basket.The process has started but it has a long way to go.
How will FII flows pan out?
FII flows can see transient volatility, but, we expect flows to stay solid directionally. The most encouraging part about Indian equities is that domestic flows are coming back.Households have a long way to go in terms of allocating their money into equity. — Neal Bhai Reports