Market focussed on earnings, not elections

Though the political uncertainty bothers, the market has shown the ability to withstand changes in the political landscape and has provided consistent performance over the past decade, said Prateek Agrawal, business head and CIO, ASK Investment Managers, in an interview with Ravi Ranjan Prasad. The market is not worried about elections as the pace of economic growth is accelerating, the government order momentum is high, and the consumption part of the economy is doing well, he said. Excerpts:

What’s your take on global cu­es affecting the local market?

Indian macros witnessed considerable improvement between 2014 and 2017, before the oil pr­ices began rising. Our current account deficit and fiscal deficit have improved. The stress in the economy, which in the past manifested in the form of fuel subsidies and corresponding burden on oil companies, is not there anymore. Thus, while stress on the economy has increased, it should be able to sustain some pressure for some time as it’s in good health. But if oil prices stay high for longer, then the stress would build up over time. While there is some stress on the macro, the micros are improving. The quick data from cement and auto sales points to economic acceleration. The market is focussed on the improvement in earnings.

While FPIs were net sellers in April and in May, so far, domestic MF equity inflows regained momentum in April. Do you see the balancing act by DFIs continuing in the near future?

The inflows into equity from domestic investors are structural and should sustain over a long period. Indians are under-invested into equities as an asset class with just about 5 per cent allocation. The largest part of allocation is towards housing, gold and debt. Th­is needs to correct and the su­stained flows into equity are a ma­nifestation of that. The popularity of systematic investment plans is increasing and the investor is approaching the market with a long-term allocation rather th­an in a short-term tactical fashion.

As the Indian investor has more disposable income, the ability to take a higher risk towards a goal of achieving higher long-period returns would rise. The sustained inflows have made the ma­rket deeper and allowed cont­inu­ed sale by FIIs to be absorbed. It’s a good trend and has helped disengage the Indian market fr­om global markets, to some exte­nt. The global funds were just ma­rginally overweight India at the beginning of 2018. Indian gr­owth outlook is getting stronger and over a period of time one sho­uld expect FII buying to re-emer­ge.

Will Karnataka poll outcome impact the equity market?

Political uncertainty is something that bothers the market. The ma­rket wants predictability and continuity. The ruling dispensation at the Centre is seen to have maxed out in the North and needs to create an impression in South to return to power on its own. In this context, Karnataka elections are being watched closely.

But the good part of the market is that it has the ability to grow well, has shown its ability to withstand changes in the political landscape and has provided consistent performance over the past decade and longer. Our investing style focuses on this part of the market. The focus over the next 2 years should be consumption, which would be supported by str­onger government spending, poll spends and good monsoon.

Do you see the pace of economic growth getting disturbed with the government refraining from taking certain policy decisions in a poll year?

The pace of economic growth is accelerating. The government order momentum is high. The consumption part of the economy is doing well. We are not worried about elections and are keeping ourselves focussed on the consumption plays that tend to do well during such periods.

The Indian market offers several companies, which have been able to grow at a high rate (over 20 per cent compounded) over long periods over several government changes, global financial cr­i­sis and extremely high oil prices. The market has recognised these businesses. We are keeping focus on such businesses as it’s the best way to provide investors preservation and growth of capital.

What’s your take on the fourth quarter earnings season?

There is some uptick in the IT se­ctor. But it would take time for the sector to achieve mid teens gro­w­th rates. NBFCs and private ban­ks have provided good results, as have auto and FMCG companies. Metal companies should also report good numbers. We expect PSBs to report higher NPA recognition, which would pull down reported profits. But the key here is to see if the peak stress is behind or if it would still come in future. PSBs also have the struggle to have equity, without which they would not be able to participate in the India growth story. To have access to growth capital is crucial. Thus the government’s recapitalisation plan is vital.

What’s your view on the dir­ection of rural demand?

Good monsoon will be good news for the market. The agri-related businesses should do well in response. The whole economy is expected to perk up if the rains are good in distribution. Cement, autos, white goods and FMCG companies should do well. This year seems to be the year for consumption stories as there is a lot going for it. The risk to this part of the market is higher interest rates in response to higher inflation on the rupee depreciation.

How do you see the rise in GST collections in April?

Strong GST collections in March helped alleviate fiscal concerns to some extent. But we ne­ed to stu­dy the trend. E-way bill was impl­emented after March and the nu­mbers are expected to im­prove. As the market gains co­n­fidence in the fiscal math, presented in the budget, the bond yi­elds should fall and the equity ma­rket should have some buoyancy.

The rupee has weakened to a low of 67 to the dollar and crude prices have shot up to $75…

A lower rupee on the margin increases the competitiveness of several globally linked industries. IT and pharmaceuticals benefit. Metals benefit because the commodity prices are dollar-linked and costs rupee-linked. Hence margins improve. But India centric businesses suffer on cost escalations and resultant lower ma­r­gins. On the whole, a depreciation does result in small improvement in overall market EPS.

Depreciation of the currency in the past resulted in sharp market swings. It happens on account of large influence of FIIs who tri­ed to avoid losses to their portfolios and shift money to the dollar assets. FIIs should be expected to act in this manner. But as the influence of local money is larger than FII money, small depreciation of the currency should not cause worries. As India gets richer, Indian money would have lar­g­er influence on the bourses rat­her than FII flows and the market would then be focused on earnings impact rather than anything else.

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