The rupee has hit life-time low recently, but it is still relatively better placed than during the US Federal Reserve taper tantrum of 2013, and has fared better than some of the other fragile emerging market currencies year-to-date in 2018, said Sampath Reddy, chief investment officer, Bajaj Allianz Life Insurance, in an interview with Sangeetha G. However, weaker rupee and inflation can emerge as macro-headwinds for the market, he added. Excerpts:
Stocks are at all-time high levels. Is there a possibility of market reversing, similar to what happened in 2008?
Economic growth is recovering, and India is projected to be one of the top performing major economies this year. Corporate earnings growth trajectory is also recovering, after witnessing muted earnings growth in the past few financial years, and we feel that the equity markets will primarily be driven by earnings growth, going forward. Therefore, we feel that India is relatively better-placed compared with its Asian and Emerging Market (EM) peers, both on the micro and the macro front. In the emerging market risk aversion that we saw year-to-date in 2018, India has managed to outperform by a decent margin, and also saw relatively lower foreign outflows compared to its Asian/EM peers.
At present, we are not too concerned with the markets touching all-time highs, and do not expect a 2008-09 like scenario. In the short-term, we may see some volatility in the market, and advise investors to temper down their return expectations, with valuations being elevated – as a result of which earnings need to play catch-up.
Also, in the short-term, even though the micro picture is improving, there may be some headwinds on the macro side. But in the long-term, we are still positive on the market, as the India growth story remains intact, and we expect equity market returns to broadly track earnings growth.
How do you evaluate earnings’ growth of firms and what is the role of base effect on it?
Earnings growth is showing clear signs of recovery, and the recently concluded Q1FY19 corporate earnings season has broadly been good, even if we consider the lower base effect due to implementation of GST in the year-ago period. We saw strong volume growth in Q1FY19 results, and at an aggregate level – benchmark Nifty index sales growth was at a multi-year high of around 24 per cent YoY during the quarter. The Nifty profit after tax growth was below estimate at 10 per cent YoY for the quarter, mainly dragged down by corporate banks, which declared lower growth due to higher provisioning during the quarter.
Excluding corporate banks, the Nifty PAT growth was at a healthy 25 per cent YoY.
Going forward, do you think firms will continue to report good growth figures and why?
Yes, earnings growth will continue to recover, and we expect 15 per cent plus CAGR earnings growth in FY19 and FY20. The sectors that we expect to drive earnings growth going forward are private financials and consumption related themes. The recovery in earnings growth is also expected to be aided by earlier under-performing sectors, which we feel may have bottomed out – like corporate banks and pharma.
As LS polls is just 9 months away and some key states are approaching assembly polls, will the government focus get diverted to populism, putting growth initiatives on back burner?
We have not seen too much populist measures so far by the government. It still appears to be committed to fiscal discipline and consolidation, which should limit the magnitude of populist measures, in our opinion.
How will inflation and rupee movement impact markets?
Both, weaker rupee and inflation can emerge as macro-headwinds for the market. The rupee has hit life-time low recently, but it is still relatively better placed than during the US Federal Reserve taper tantrum of 2013, and has fared better than some of the other fragile emerging market currencies year-to-date in 2018, like Turkish lira (which has seen sharp depreciation), Brazilian real, S African rand and Russian ruble.
But depreciation in the rupee does drag down returns for foreign portfolio investors into India, and could lead to foreign outflows in case of any global risk aversion. Higher oil prices and on-going trade wars can continue to put pressure on the rupee, although a lot of the negative seems to be priced in already. One of the key upside risks to inflation is elevated and rising crude oil prices. Rising core inflation (ex-food and fuel) also has been a bit of a cause of concern lately, but most of it seems to be behind us. Food inflation, which has a significant weightage in headline CPI, has been subdued, and the MSP rate hikes is not expected to have a significant impact on headline inflation. The RBI has been pre-emptive, and has already gone in for two consecutive rate hikes in June and August, as it is committed to keep inflation in check, and within the prescribed target.
What global developments can affect buoyancy in the Indian market in the near future?
On the global front, elevated and rising oil prices is one of key macro headwinds for markets, as it has impact on inflation (and therefore interest rates), current account/fiscal deficit and also the rupee. The other global macro headwinds for markets are the ongoing trade wars, and the pace of tightening of monetary policy by global central banks.
Where is the US-China trade war heading? Do you expect participation of other economies and worsening of the situation?
The US-China trade war is a developing and fluid situation. It’s difficult to estimate its full impact. But it could lead to short-term volatility in global markets and also India, if it escalates, and spreads to other countries. But India’s exposure to the US on the merchandise and trade front is relatively low (merchandise exports to US is around 15 per cent of overexports). Thus, we see limited impact on the Indian economy.
In which all sectors, investors can expect positive momentum in festive quarters, and what is your advice for them?
Consumption-related themes typically see more traction during the festive season. We have seen strong volume growth in consumer firms, and are therefore positive on consumption theme. Presently, we are also positive on private financials, with credit growth picking up and with private banks continuing to garner market share from PSBs. The IT sector is also being benefited by a weaker rupee and pickup in economic and earnings growth in the US. We also feel the pharma sector may have bottomed out, with most of the FDA related issues behind us now, pricing pressures easing somewhat, and with a weaker rupee aiding the sector.