Banks have reached NPA cyclical peak; corporate credit offset to accelerate

Steep hike in crude oil prices and alarming depreciation of the rupee are two key concerns for the market at this point in time. With currency being highly volatile, market sentiments are also getting adversely impacted. The increased market volatility in the recent months, thanks to global and domestic factors, has resulted in moderating of mutual fund flows. Shift of household savings from non-financial assets to financial assets and within financial assets, increased allocation to direct equities and mutual funds (versus bank fixed deposits traditionally) is a structural story. Disciplined investment in mutual funds enables investor to reach financial goals and also satisfies basic investor need for having an exposure to a diversified equity or debt investment portfolio, said Pankaj Murarka, founder of Renaissance Investment Managers in an interview with Ritwik Mukherjee. Investor should follow a disciplined investment process for making investment and long-term investors should use the current market volatility to add good quality franchisees when they come to reasonable valuations, he added. Excerpts:

What’s your outlook on the Indian economy and capital market in the backdrop of festive season and 2019 general elections?

India’s real economy is recovering and investment cycle is making a gradual comeback. Public investments are accelerating at both the central and state government levels and we are seeing healthy recovery in industrial capex.

It’s a little early to call out the festive demand trend. But initial commentary by companies and the up-tick in demand from rural India suggests that demand should be healthy during the festive season.

Elections should result in increased spending by the government in rural areas and increased thrust on investment projects.

What’s your main concern about the current market?

The main concern for the present market is rising crude oil prices and the rupee depreciation. Rising crude oil prices impacts the country’s current account deficit, leads to input cost inflation across industries and increases subsidy burden on the government finances. As India is a net importer of crude, any significant spike in oil prices leads to depreciation in the rupee. Also, high currency volatility adversely impacts the market sentiment.

Are there opportunities in the current market? Which sectors would you bet on at this point of time?

We see value in sectors that are linked to industrialised part of the economy. The India industrial growth was adversely impacted during the past few years due to weak macro environment coupled with disruption caused by demonetisation and structural reforms like GST (the goods and services tax) and RERA (the Real Estate (Regulation and Development) Act, 2016). But the growth has started to return. Sectors that would benefit out of this growth are manufacturing, engineering, capital go­ods, media (both online and broadcasters) and hotels. Cor­porate banks too are well placed as they have reached a cyclical peak in bad loans and corporate credit off-take would accelerate from here onwards. Valuations in this space continue to be conducive for investment.

What’s your take on the next phase of mutual funds growth? Can they help investors reach financial goals?

Disciplined investment in mutual funds enables an investor to reach financial goals. Mutual funds satisfy the basic investor need for having an exposure to a diversified equity or debt investment portfolio. The increased market volatility in the recent months (due to both global and domestic factors) has resulted in mutual fund flows moderating. That said, shift of household savings from non-financial assets to financial assets and within financial assets, increased allocation to direct equities and mutual funds (versus bank fixed deposits traditionally) is a structural story.

Where do you see the alternative investment funds (AIF) in India two-three years down the road, in terms of investments made?

There are several opportunities emerging in the alternate investment space, which were not the case till couple of years ago. The AIF industry has evolved and is growing. There is an opportunity for experienced fund managers to build a scalable business in this space. In the coming years, the demand for AIFs would grow exponentially with evolution of the market and demand for customised portfolios by sophisticated investors.

What’s the difference between traditional MFs and hedge funds?

In the hedge funds space, you can take the absolute return approach compared with mutual funds, which are relative. Since hedge fund-run customised portfolios meant for evolved investors, portfolios are concentrated, which means around 15-20 stocks against a mutual fund portfolio that could hold 40-50 stocks.

How do you pick your investments? Do you use technical analysis or fundamental data?

We rely exclusively on fundamental research for making own investments.

How should investors handle investments for near future? Any advice for retail investors…

Investor should follow a disciplined investment process. While the near-term issues might increase the market volatility, the long-term fundamental of the economy is intact. Long-term investors should use the current market volatility to add good quality franchisees when they come to reasonable valuations.

ritwikmukherjee@mydigitalfc.com