Madhusudan Kela
Chief Investment Strategist
Reliance Capital
Markets have been volatile and the RBI has been generous with rate cuts. The government has been trying to soothe nerves on tax issues and accelerate the economic growth. Madhusudan Kela gives his view on the markets and the trends amidst these evolving changes. Excerpts:
The RBI has surprised the market with 50 bps rate cut. Do you think it is enough? Will the RBI continue to ease in subsequent policy meeting or are you expecting a long pause?
The RBI has done a commendable job of cutting the policy rate by 125 bps in a matter of just 8 months. Clearly the priorities are changing to support growth recovery. Despite the sharp rate cuts the real interest rate in India still remains quite elevated. That means there is both room and need for the policy rates to further come down. However, with 50 bps rate cut the RBI has front loaded the easing. They would like to see some transmission now. Further, CPI inflation could start to inch up from this month and therefore the RBI may wait for the next 4-5 months to see whether inflation remains contained and then begin to extend the policy easing cycle.
Is investor interest waning in the Indian market after the initial euphoria?
While there has been some disenchantment from the FIIs, domestic investors' interest hasn't wavered at all despite high volatility in the last 9 months. It's quite heartening to see that domestic investors are using this global concerns induced correction to increase their equity allocation. For eg, domestic mutual funds have got over 16000 cr INR inflows in July-September.
What are key concerns that the Indian stock market face now?
Concerns are more coming from global markets. Emerging markets are under severe pressure due to over leverage. While there has been wide acknowledgement of the EM problem and asset markets have already significantly corrected there always remains risk of some accident somewhere in the World. That said, local concerns are abating at the margin with both the Government and the RBI are trying to support the recovery. So, in the case of any global shake off India may not be meaningfully impacted.
Is the government doing enough to ensure investor interest in India? In the past few months, key measures like resolving MAT etc have been taken. What more needs to be done?
Government is trying to soothe the nerves on the tax issue. All the steps and communications are in the right direction. Beyond these specific measures, in general if the Government accelerate the reform process in the next 3- 6 months by being able to clear key bills like GST, etc then it would boost foreign as well as local investor confidence. If the growth accelerates then investor confidence automatically goes up.
How critical is the outcome of the Bihar elections?
Bihar elections are important as they would decide whether the NDA is able to garner enough strength in Rajya Sabha. So, reform process could accelerate a bit if the result in favour. However, one state election outcome will in no way decide how our macro and market will shape up over the next 6-12 months.
In an environment where a number of big companies and sectors are suffering, what are the key challenges for a fund manager?
A fund manager has to avoid committing large mistakes. It's important to differentiate what is risky and what's value. Laziness and bias, both can pose serious challenges to portfolio performance. Extreme rigour is needed to be able to discern opportunities in sectors which are facing headwinds. Our market is rewarding growth as that's scarce. So, while value is important one can't lose sight from near term growth outlook that a particular sector or company has.
You are known for your stock selection skills. Market has been rough in the past many months now. How have things changed for a stock picker?
The basic tenets of stock picking remains the same. That is to find stories with a combination of underappreciated growth and relative value. However, there has been a lots of instability in the overall business environment in the last one year. This means that one has to keep assessing the existing investment every three months to see whether the investment stories are on right track or not. Since the visibility is less, the need for frequent revisiting the investments has gone up to ascertain whether the existing investments are doing well and whether there is a need to replace that with more compelling opportunities at hand.
Oil prices have corrected sharply. Can oil price recover sharply in the next one year and pose significant risk? What's the outlook?
While noone can be certain, it seems that commodity super cycle is behind us. That means all commodity prices including oil to remain contained in medium term. In the next one year, its highly likely that oil prices remain stable at lower levels given the demand supply situation that I have in mind. Of course, taking 5 -10 years view now on anything is neither possible nor too desirable. That said, there are various breakthroughs happening in energy space where alternative sources are becoming more viable. This should cap any material flaring up of the oil prices in the medium term.
Where do you see the market in the next one year, say next Diwali?
There is no point giving the index target. What I believe is that the market will be much higher from the current levels. What I am more convinced about that there are many stocks which provides remarkable risk reward opportunities now. The focus has to be in finding those alpha ideas rather than trying to exactly predict the market level a year from now.
* As told to Busness Standerd Oct 7, 2015