As with any structural reforms, they tend to be disruptive in the first few years and have an economic and political cost in the short-term but their long-term benefits are enduring and tend to surprise on the upside. The political cost of these reforms that the government executing the reforms has to incur is visible from the outcome of three state elections held recently, said Pankaj Murarka, founder of Renaissance Investment Managers, in an interview with Sangeetha G. Excerpts:
Looking back, how do you evaluate the equity market movements in 2018?
The year 2018 started on note of high optimism on the back of strong returns from Indian and global equities in 2017 but it ended on note of cautious optimism blended with some skepticism. At the start of the year, we had mentioned that India is experiencing the Nifty50 bubble that the US experienced in the 1960’s and growth and quality companies are richly valued. There were three segments of froth in Indian equities at the start of 2018 – mid-cap and small-cap, non-banking finance companies (NBFCs) and the consumer sector. The valuations in these sectors were extremely demanding and growth expectations were significantly mis-priced. As a result, we were very selective in our exposure to these segments.
What were the major triggers that moved the global equity markets in the past year?
Events that moved global equity markets in 2018 were rate hikes by the US Federal Reserve, trade conflicts between the US and China, spike and subsequent fall in crude oil prices and apprehension towards end of the year about a recession in the US economy in 2019.
What is your broader outlook for both the domestic and international equity markets for this year?
Despite skepticism on the street, we look forward to 2019 with fair optimism. We believe 2019 is going to be a year to two halves. Given, the concerns around election cycle in India and global risk-off, the first half of the year could be volatile from markets perspective. Global risks have come to the fore with apprehensions about impact of trade war, the US recession in 2019 and rate hikes by central banks impacting business and consumer confidence.
While India markets would get impacted in the short-term due to any sell off in global equities, we firmly believe India is in a much better situation to deal with any of the global risks than any other economy in the world. The second half of FY20 should witness significant recovery in the Indian economy and the much elusive earnings growth should comeback strongly.
How will the dollar weakness and trimmed interest rate hikes by the US Fed impact the Indian equity markets and the emerging markets in general?
A weak dollar and a trimmed interest rate hikes should be positive for the emerging markets including India. A benign US dollar and stronger growth in emerging markets should lead to higher capital flows into emerging markets.
Considering the market reaction to the recent assembly elections, how do you foresee the market movements during the parliamentary elections this year?
Over the last few years, India has executed significant structural reforms including the goods and services tax (GST), the insolvency and bankruptcy code (IBC), direct benefit transfer (DBT), the real estate regulation authority (RERA) and few more. As with any structural reforms, they tend to be disruptive in the first few years and have an economic and political cost in the short-term but their long-term benefits are enduring and tend to surprise on the upside. The political cost of these reforms that the government executing the reforms has to incur is visible from the outcome of three state elections held recently. While market will remain volatile in the run-up to the general elections in 2019, after the elections the focus will shift back to corporate earnings and macroeconomic developments.
We believe that the second half of FY20 should witness significant recovery in Indian economy and the much elusive corporate earnings growth should comeback strongly.
Which are the sectors that look promising this year and which ones should be avoided?
We are constructive on the outlook for corporate banks given that we are at the peak of NPA (non-performing asset) cycle and profitability of these banks had been impacted significantly in the last few years because of the high provisioning cost. Going forward, we expect the profitability to improve as credit growth picks-up and provisioning cost comes down. We continue to like engineering and capital goods sectors as well as we believe that riding capacity utilisation should lead to revival of India’s investment cycle. Capacity utilisation across the manufacturing sector has been rising steadily and as it inches closer to 80 per cent, it should lead to new investments by corporate India. We are cautious on the consumer sector because we believe that the valuations in the consumer sector are mis-pricing future growth expectations and are likely to moderate over the medium-term.
What is your advice to the investors during times of turbulence and volatility?
Indian’s structural growth story is intact. One should use the volatility in the early part of the year to build the portfolio for the next growth cycle of India, which is around the corner.