Rupee to remain under pressure due to dollar’s strength, twin deficits

An election year makes the market nervous and volatile and any outcome against expectation will magnify the volatility, said De­ven Sangoi, chief investment officer (equity) at Aditya Birla Sun Life Insurance, in an interview with Falaknaaz Syed. But we believe the long-term growth rate in India is driven by demographic profile, which is structural and not dependent on political outcomes, he remarked. Excerpts:

How do you see the fourth quarter earnings? When do you expect a revival?

The Nifty 50 companies are expected to report 14 per cent sales growth with similar profit growth in the fourth quarter. Excluding the public sector banks, the Nifty sales, Ebitda (earnings before Interest, taxes, depreciation and amortisation) and PAT (profit after tax) have grown 16.8 per cent, 12.1 per cent and 12.9 per cent compared with the expectations of 16.7 per cent, 9.7 per cent and 11.5 per cent, respectively. Normal monsoon forecast bodes well for rural growth and will be instrumental in driving recovery.
How are you reading the market? Will the momentum continue? How do you see the valuations now and where do you see the index in this year? What are the major global and domestic negatives that can weigh on the markets?

This is a year of consolidation. We will witness bouts of volatility in the near term. Upcoming state elections, global macro events will keep upside curtailed whereas strong earnings growth will lead to limited downside from current levels. The Sensex now trades at 17 times FY20 earnings, which are in line with the long-term average.

What kind of returns have you clocked in your key funds? Are you confident of repeating that performance over the next five years?

Magnifier, Maximiser and Multiplier are our key funds and the table below entails strong performance delivered by these flagship funds. Given our research-oriented process and bottom-up approach, we will continue on the path of replicating the performance in the future.

What will be the impact of elections on the market? Would the market get nervous if the BJP loses?

Typically, election year makes the market nervous and volatile. Further, any outcome against expectation will magnify the volatility. Any likely event of the Bharatiya Janata Party (BJP) losing power might be viewed as negative for reforms and key policy changes. However, we believe the long-term growth rate in India is driven by demographic profile, which is structural and not dependent on political outcomes.

What is your outlook on foreign fund flows into India with the looming Fed rates hikes, improvement in the US economy and consequently on the rupee?

India is one of the most expensive markets against other emerging ma­rkets. Foreign flows have been muted and will stay so in the near -term. I expect the rupee to re­main under pressure due to given dollar strength and twin deficits.

How are you reading the developments at the leading private sector banks in the country? Would you reduce your holdings in these banks?

Private sector banks were going through a rough phase in last three-four years. However, one can reasonably assess that worst of the corporate credit cost cycle has been left behind. Con­si­de­r­i­ng the current state of public se­ctor banks, the private banks are now in a very good position to in­crease their market share and expand balance sheet. Keeping the same in view we have rece­n­tly incr­eased our exposure in these banks.

Which sectors are you bullish on? What big themes are you betting on this year?

We are bullish on consumer, information technology and capital goods. Rural and global growth recovery, export-oriented busin­esses are some of the key themes we are placing our bets on.

What is your outlook on the banking sector in the light of the insolvency and bankruptcy code (IBC)? Resolutions have been slow at NCLT...

Anything that is structural and involves multiple judiciary or laws will always have a slow start. However, looking at the resolution of a steel company and other companies that are in the process – it is good to see that we have made considerable progress. I am hopeful that other cases will also get resolved quickly. With this we are harnessing a positive outlook on the corporate banks as the earning downgrade cycle is coming to an end.

Bond yields have surged quite a bit. To what extent can this impact the market? How does a rising bond yield impact your portfolio?

Rising interest rates are adverse for a highly levered corporate. As long as the spike in the interest rate is not sharp, it is manageable. But any further increase in interest rates from the current levels will impact growth. We have tweaked our portfolio to the changing macro environment to further minimise the impact.

With oil prices rising, what is the scope for fiscal prudence and the impact on fiscal deficit?

India is a net oil importer with $109 billion oil imports in FY18. Every one dollar change in crude oil prices increases the burden by $1.8 billion. Impact on fiscal deficit depends on the government’s stance of passing burden to consumers or cutting excise duties.

What do you expect the RBI to do in June policy review? What is your outlook on interest rates?

While it’s a close call, we would opt for a 25 basis points hike in the June policy review. Our outlook remains that the rates will remain on the rising trajectory.

The RBI has substituted various resolution schemes into a new simplified one, which is str­icter on implementation, recognition of non-performing loans, and higher provisioning. What will be the impact on public sector banks and corporate focused private lenders?

The current norms of the Reserve Bank of India (RBI) are painful as it up-fronts lot of provisioning but removes uncertainties on the future earnings. The current provisioning norms have impacted the PSU banks as the same has led to higher capital requirements for meeting the regulatory norms. However, private corporate banks have better capacity to lend and grow the balance sheet.

How have you sized up the IPO market with the kind of paper that is coming and the pricing?

Recent initial public offerings (IPOs) that have hit the market have reasonably good quality of businesses. However, the valuation of the IPOs remains elevated leaving limited upside for the investors. We have been very selective in terms of business and valuations while investing in new IPOs.