We are quite optimistic about the prospects of the market and believe equity markets can outperform over the medium to long term

BFSI Industry Interview
On: Apr 29, 2015 | From: Advisorkhoj Team
BFSI Industry Interview in Advisorkhoj - We are quite optimistic about the prospects of the market and believe equity markets can outperform over the medium to long term

Sunil Singhania is the CIO - Equities, Reliance Capital Asset Management Ltd. By qualification, Sunil is a CA & CFA and has a total experience of over 21 years and over 12 years with Reliance Mutual Fund. Before his association with Reliance Mutual Fund, Sunil gained considerable experience on the sell side in Indian equity markets. He is first from India to be elected as the Director on the Global Board of Governors of CFA Institute, USA. Sunil was the Promoter of The Association of NSE Members of India; a body of stock brokers. He was a member on the Standards & Practice Council of the CFA Institute, USA, for 6 years, the first and only member so far based in India to do so. Sunil was the Founder of the Indian Association of Investment Professionals, the CFA India society and was its President for a continuous period of eight years. Having travelled extensively across the world, Sunil has attended many global investment conferences and seminars.

What is your view about the markets in the current FY 2015 – 2016 as the finance minister presented a very progressive budget. Do you think this budget has provided the necessary impetus in kick starting the investment cycle?

The key message from the Budget was the continued commitment to the priorities of this Government, which was clearly articulated over the last 6 months. Whether it is Make in India, Swachh Bharat Abhiyan, Ease of Doing Business - all the major initiatives of this Government form the core of this Budget. The encouraging aspect is the long term road map that this Budget has laid out to achieve the Government's priorities. For example the four year roadmap outlined for reduction of corporate taxes is a very critical part of the Make in India thrust. The budget also provided the impetus to revive investment cycle through the National Investment Fund where the government itself will fund the first year allocation of Rs. 20,000 crores and from then on, there will be annual allocations made into this Fund to help it realize its goals. Allocations to roads and railways were increased substantially, but more importantly, the 5 year goals for both these infrastructure areas have been clearly spelt out.

All these key initiatives are likely to boost the economic activity in the next few months. Overall we believe it’s a growth enhancing Budget, and one that is completely aligned with the direction that this Government has clearly spelt out 6 months ago.

Do you think that Sensex / Nifty is overvalued at current levels?

The earnings growth has been muted and we need to look at the broader market valuation to the cyclically depressed earnings. Hence the market valuations may appear to be expensive on a Price to Earnings basis. However as the economic recovery gains more ground the earnings is expected to substantially improve & estimated to grow at 15% -20% over the next 5 years.

In the previous bull run when the earnings tripled the Sensex gained over 6 times. Hence we believe while at the current levels of earnings markets may appear to be fairly valued, the overall market valuation is still reasonable from a longer term perspective.

Do you the see the capex cycle reviving in short term in light of the investment related announcements made in the Budget and the likely execution of that in the current FY?

Budget increased the capex spends by over 25% yoy with an emphasis on defence, railways and highways/roads. The govt also announced setting up of National Investment and Infrastructure Fund (NIIF) with a view to push infrastructure capex. However importantly along with increased capex spends the govt spelt out long term goals for the same.

Hence we expect the capex spends to be higher going forward.

Do you see significant execution risks with regards to the infrastructure investments announced by the Finance Minister? Is the market concerned about execution risks?

The Budget presented a clear roadmap for executing the Government's vision and the capex announcements were accompanied by 5 year goals for the same. The Plug and play in 5 UMPPs (Ultra Mega Power Projects) is a great example of execution (where the government will pre-arrange all the permissions and approval prior to auctioning the project to private developers) and this model will be adopted in other infra projects as well. The Coal block auctions have taken place and going forward the winning bidders will be able get access to coal – which will help in removing the key bottleneck for a number of stalled projects. All these should give economic activity a good boost in the coming months.

When do you see pick up in EPS growth of Indian companies?

As far as corporate profits is concerned, there are two main drivers: Demand Pick up and fall in interest rates. Consumer demand always picks up with a lag. We think that the impetus will come initially from stalled projects getting off the ground - and there are clear signs of progress on this front. Consumer demand will come in later as a growth driver.

However on the interest rate front we have already witnessed a 50 bps reduction over the last 3 months and we remain optimistic on further rate cuts in the months ahead.

A combination of these factors will bring corporate profits onto a sustainable growth path. The previous quarter numbers were disappointing largely due to huge inventory losses caused by the collapse in raw material prices due to the crash in commodity prices. March quarter should be a much more stable quarter, but real growth in profits can be expected only from the September 15 quarter onwards.

RBI has done two rate cuts already in CY 2015. How many more rate cuts can we expect this CY year 2015? When do you see the RBI rate cut actually translating into higher credit off takes?

As regards interest rate cuts, it is very clear that the Government and RBI are on the same page as far as direction of the economy is concerned. With two rate cuts already of 25 bps each by RBI further rate action would depend on two major macro parameters continuing disinflationary pressure and progress on high quality fiscal consolidation.

We expect the strong disinflationary trend to continue and inflation to remain closer to 5 to 5.5% for FY16. The fiscal deficit target of 3.9% for FY16 seems realistic. This inflation outlook and the real rate policy framework followed by RBI followed by governments adherence to quality fiscal consolidation indicates that we can expect further rate cuts in FY 16 but it will be a gradual process in stages.

How will rating agencies view the delay in reducing fiscal deficit to 3% of GDP by one year?

We believe the fiscal deficit number of 3.9% for FY 16 is not very disappointing. We must remember that when the FM took on the target of 4.1% for this year, people were expecting it to slip to 4.5%. Now that we are at 4.1% and the roadmap over the next 3 years has been laid out going down to 3% which we think is very reasonable and pragmatic. The recent upgrade of India’s sovereign outlook by Moody’s, to ‘positive’ from ‘stable’ illustrates the increasing comfort of the rating agencies.

Do you see higher FII flows into India equity market over the next 12 months?

We believe India continues to be a leading investment destination aided by improving fundamentals and policy reforms. In fact India is expected to be amongst the fastest growing economies over the next few years. Hence the FII sentiment on India remains positive and with the recent govt initiatives like merger of FII & FDI limits etc the flows are expected to stay robust over the year.

How is India placed relative to other emerging markets from a portfolio investment flow perspective?

India continues to be well placed versus other emerging economies and the improving macro parameters coupled with policy actions are expected to further drive the GDP. IMF and Word Bank recently stated that they expect India’s GDP growth to outpace China and India will emerge as the world’s fastest growing major economy. Thus we believe India continues to be amongst the top investment destination in the emerging market space and expect the interest from foreign investors to remain strong.

The Government has set April 2016 as the timeline for implementation of Goods and Services Tax (GST). In your view, is the timeline realistic?

GST is one of the important indirect reforms that have been outlined by the Govt. It will improve the business climate, reduce the cost of doing business, increase efficiency and boost overall productivity. The increased revenue mobilization in the medium term will help to create a fiscal buffer that could be used to boost government’s capital expenditure and provide an investment stimulus to the economy thereby contributing to higher economic growth.

In the budget the govt announced an additional 1o% sharing of Central taxes with the States which can further improve the confidence of the state govt and help in implementing key reforms like GST.

Hence we expect the Central Govt to adhere to the implementation timeline outlined for GST.

How do you view the global macro scenario? Are their significant global risks that may impact Indian equities?

The global growth outlook remains moderate aided by low inflation, monetary support by Central Banks and lower commodity prices. The key events that can have an impact on Indian equities include:

  • US Fed funds rate tightening: If the US Fed tightens rates ahead of the market expectations then could lead to risk aversion in global markets.

  • Sharp rise in US (global) rates and resultant US$ appreciation: If rate tightening in the US continues it may lead to widening in rates differential in US versus the rest of the World. This may lead to abrupt rally in US$ from an already elevated levels. Strong US$ may result in risk aversion led outflows from EM assets.

  • Flare up in global commodities (mainly Oil): Due to any fundamental or geo-political reason if the global crude prices sharply rises then it may lead to risk aversion. India is particularly susceptible to rise in oil prices.

  • Greece exit from the Eurozone: The rising disconnect between Greece and other Eurozone members, mainly Germany, may lead to exit of Greece from the Union. This could lead to losses to the lender nations within the Eurozone and create disturbances in the monetary union.

However we believe while these events may have near term impact on the markets given the global linkages, the outlook for domestic markets continue to remain optimistic on the back of strong fundamentals and pro growth policy actions.

When you expect the Federal Reserve to start increasing interest rates in the US? How big an impact will it have on FII flows to India, if rates are hiked in June?

In its recent policy meeting US Fed sounded upbeat about the economy noting that the fall in oil prices has been beneficial in boosting household spending power. However the Fed reiterated is patient' stance with reference to monetary policy normalization. Hence we do not anticipate any rate hikes in the near term and expect the hikes to take place towards end of the year.

A rate hike in US theoretically implies that capital could incrementally flow into the US, away from Emerging Markets, including India. Having mentioned that, we believe, India is far better placed this time round with strong macros and a balanced economy. The likelihood of US increasing the rate is fairly well anticipated by the markets, and should not be a surprise leading to sharp outflows. Therefore, we believe except for some possible short term volatility, the long-term fundamentals of respective economies would drive equity market growth over the medium to long term, and India is fairly well placed.

With stringent anti Black Money law, do you see more investments flowing into equity / mutual fund assets that would have otherwise gone to asset classes which usually involve cash transactions?

The anti Black Money law with stringent norms and punitive consequences to curtail the system leakage is likely to lead to more accountability and reduce the impact of parallel economy. Given the current positive outlook for both equity & debt asset classes we expect more allocations to be shifted to equity/debt funds given the key advantage like fund management expertise, tax efficiency, convenience etc

The Rs 50,000 additional tax saving for investment in the National Pension Scheme makes NPS much more attractive for private sector employees. For years NPS has not been popular with private sector employees as much as the policy makers would have liked it to be. Will the FM’s proposal make now NPS an attractive investment option?

We are awaiting more clarification on the additional tax savings for investments in the National Pension Scheme. However at the same time the increased tax benefit will definitely be an additional advantage for investors.

FM has allowed employees to choose between EPF and National Pension Scheme. Do you see a significant shift of retirement savings from EPF to NPS going forward?

We do anticipate a gradual shift of retirement assets from fixed income oriented options to schemes with higher exposure to asset class like Equities which can potentially generate higher returns. We recently launched an equity based retirement scheme which evinced tremendous investor interest, given the long term wealth creation potential of equities. Hence we believe as the investors become more aware of key aspects of retirement planning like superior inflation adjusted returns, increased life expectancy etc, investors/employees are likely to favour retirement products which offer higher growth potential.

Which industry sectors will benefit most from the 2015 budget?

India recovery themes like urban consumption, capital goods, financial offer interesting opportunities. Among the themes with global advantage we are positive on IT and pharma which are expected grow in a steady manner. We are also positive on Building materials in general and cement in particular.

On capital goods, we look at two key aspects when considering any stock. One is that the balance sheet should not have any stress in it. Secondly, visible earnings must justify current valuations rather than the hope of earnings 3-5 years from now, which is already getting discounted in the price.

Do you see midcaps continue to outperform large cap stocks over the next 12 months? What is your advice to investors in terms of allocating their investments between large cap and midcap stocks / funds over the next 2 to 3 years?

We have witnessed a strong outperformance of Mid & Small cap space over the last 12 -18 months. The current valuation differential between large cap and mid caps slightly favours the large cap space. However in line with optimistic view on the domestic markets and the expected strong recovery over the medium term both large & mid cap funds appear to be well placed. Investors with higher risk appetite can consider higher allocations to Mid Cap funds while investors with moderate risk profile can have higher large cap allocations.

Will we see increased volatility going forward? What is your advice to investors?

Equity markets are expected to remain volatile in the near term given various domestic and global events like approval for key reforms like land bill, GST, worries over possible Greece exit from EU, interest rate hike in US etc. However long term investors can benefit from such volatile times and can consider increasing allocation in case of any significant market correction.

Some retail investors are waiting for a "deep enough correction" to invest in equity. Do you see a deep correction in the next 2 – 3 months? How deep will the correction be?

Indian equity markets witnessed a secular uptrend over the last 12 months or so and hence a period of consolidation can be expected in the near term. Markets have witnessed a reasonable correction over the last few weeks and long term investors based on their risk profile & asset allocation can benefit from such correction. Various studies have established that ‘Time in the markets’ works more effectively that ‘market timing’ and hence it’s important that investors do not attempt to time the markets & invest for the long term.

Are you making any changes to the portfolio of your flagship schemes based on your outlook or new market trends?

All our funds are well positioned to benefit from the domestic revival themes like consumer discretionary, product engineering companies. The funds have optimal allocations to consumption & capex oriented themes along with allocations to high ROE themes.

Equity markets have run up significantly in the past 12 to 15 months. Should investors start moderating their return expectations going forward?

As mentioned earlier after a secular uptrend over the last 1 year or more, markets were expected to consolidate in the near term. Given the base effect we believe investors should have reasonable return expectations from equity markets and invest from a medium to long term perspective. However we remain optimistic on prospects of the equity markets and believe equities will be amongst top performing asset classes over the medium term.

In the backdrop of the current market scenario what is your advice to mutual fund equity investors? And the funds from your stable that would be suitable at this point in time?

We are quite optimistic about the prospects of the market and believe equity markets can outperform over the medium to long term. Mutual fund investors should invest in a disciplined manner and invest from a medium to long term perspective.

All our diversified equity funds are well positioned to benefit from the domestic recovery and optimistic global growth scenario & investors can consider participating in the same based on their risk preferences.


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