Sunil Singhania
CIO - Equity Investments
Reliance Mutual Fund
How do you see the current market volatility of Indian equity markets?
We see the short term aberrations in the form of global and domestic challenges as opportunities. Volatility reduces if one elongates the investment horizon. A true equity investor should focus on wealth creation than income generation. To him or her, volatility should not be a concern.
Do you think investors should be worried about the outflows from India though they have reduced a bit?
Big chunk of outflows have happened from sovereign wealth funds, which were the biggest investors globally. These funds had huge surpluses because of higher oil prices. Now the situation has reversed. Now with deficit in their balance sheet due to low oil prices, outflows are happening. A billion dollar outflows should be looked at in comparison with monthly savings of $6-7 billion a month India is getting from lower oil prices.
My interaction with global investors gives me confidence that India is at much sweeter spot than any other country in the world. They are looking at India much more positively than any other country. At the same time India is a part of emerging market. So if emerging market gets outflows, Indian market will get impacted. I think the moment the world stabilises, India will be the biggest beneficiary of in terms of flows and markets.
What is your current market strategy?
As per mandate we have to maintain a diversified strategy in most of our funds. However we are bullish on the financials given the move happening from physical savings to financial savings. Secondly we believe urban consumption should do much better than rural consumption, which has got affected because of poor rains and lower agricultural prices.
On the other hand, urban consumption is benefitting because inflation has come down. We would soon have seventh pay commission. And generally the environment on jobs in the urban areas is better than earlier. We also good quality good capital goods companies because if India has to go from $2 trillion to $4 trillion, lot of spending will have to happen on infrastructure, railways, capital goods etc.
Almost everything on macro seems to be falling in place. When do you see earnings picking up?
Between 2002-2008, corporate profitability tripled with a compounded annual growth rate of 20 per cent and Indian equity markets went up by six times. It partly happened because of massive recession in 1999-2002 across all industries except information technology. As a result no company set up capacity.
When the economy started to revive, companies were able to utilise idle capacity and operational leverage came into play. Also, interest rates fell very sharply in 2002-03. From 9 per cent, yield on 10 year government paper came down to 5.5 per cent. So financial leverage also came in.
We are in the same kind of scenario today. In 2008-14, India had capacity but no demand. Interest costs went up. So operational leverage became a headwind and profit growth was hardly there. The moment the demand revives, you will have massive operating leverage coming into play. Interest rates are also falling. We have had 125 basis points rate cut in the last one year. So financial leverage will also come in. Our view is that between 2014-2020, earnings can rise at a CAGR of 17-18%.
Which sectors will lead in the earnings recovery?
It will be a mix of many sectors. Good thing about India is that we are a very diversified nation. So we have banking, financial services, information technology and pharmaceuticals. We have a mix of import dependent and export dependent sectors.
Do you see more room for rate cuts by Reserve Bank of India?
Given RBI's target of 1.5% real interest rate and if inflation continues at 4.5-5%, there is still room left. But it is too early to expect that. We have seen almost all banks reducing their base rate by 25-50 bps after the recent monetary policy. So I think finally this rate cut is going to get transmitted. So let's wait!
Do you think Fed rate hike will be a non event now?
Whenever there is an expectation of a big event going to be happen, people overanalyse it in advance. And by the time it actually happens, it is already discounted so much by the market that there is no impact. We have seen such events like fiscal cliff, tapering of quantitative easing by the US, Greece exit, and so on in the past. Our view is that the Fed increasing interest rates in fact might be taken positively by the markets because it will be a signal that US economy is growing quite fast.
What is the risk for Indian markets either global or domestic?
We believe that the world is much more stable than what it was in middle of 2010. We don’t see a catastrophic kind of a scenario. Yes, global growth is going to be slower but this will be positive for India as that will mean softer commodity and oil prices.
On the domestic front, our macro economy could not have been better. The risk obviously is that there is expectation the government spending will pick up and the economy will start to revive, which we are also very confident. But there is small percentage probability that it might not happen. In the near term if the elections results go against the ruling party that can be a short term risk. Near term risks will always be there but from medium to longer term perspective we are very clear, things are moving well for India.