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Gone are the days when investors had to fear about flows going out of India, says Gaurang Shah, head investment strategist at Geojit Financial Services in an interview with Aprajita Sharma. Whether or not the US Federal Reserve revises interest rates, it may matter little to the domestic market as retail investments through the SIP route will go to record high levels, Shah says. Edited excerpts:
Can you draw the difference between valuations in 2014 when PM Narendra Modi stormed to power, and now? Do you think the prevailing valuations are factoring in reforms and a smart recovery in earnings?
When PM Narendra Modi came to power in 2014, there was virtually nothing to cheer about. But in the last two and a half years, he has initiated some major changes like demonetisation, then re-monetisation, most importantly the GST, Benami Property Act and the ways to get black money back into India. All these will trigger a lot of positivity and the signs are already visible at the grassroots level.
In terms of the outlook for India, there has been considerable improvement and we have inflows coming into India from a long-term point of view. Talking about earnings valuations, earnings have also improved. One of the worst fears was that demonetisation would have a bad impact on earnings of certain corporates like consumer durables, FMCGs and consumer discretionary, but none of the earnings reported by companies in these sectors have showed any signs of negativity. With re-monetisation picking pace, earnings are expected to increase not only for this quarter but also for the next quarter. Having said that, there are certain pockets of overvaluation which may need price adjustments, price corrections and time corrections. But over a longer period of time, all opportunities on the downside will be great opportunities to buy.
We believe once the GST is implemented from July 1, 2017, there will be tremendous amount of positivity in terms of GDP growth rate, streamlining of indirect taxes and tax collection by the government.
What is your outlook on the GST in its current form as multi-layer GST along with cess seems to have diluted the goal of 'one nation, one tax'?
Under the GST, all 13 types of indirect taxes will be streamlined into one consolidated tax ushering in one nation, one tax regime. Tax collection from indirect taxes by the government will be much higher. There will be better ease of doing business, and ease of moving goods and services. On the flip side, the implementation of GST could lead to inflationary pressures owing to certain adjustments. There are obviously some negatives and some positives. This is the largest tax reform undertaken in India and is going to be beneficial from a long-term perspective. Once the GST is implemented from July 1, 2017, there will be tremendous amount of positivity in terms of GDP growth rate, streamlining of indirect taxes and tax collection by the government.
US Federal Reserve looks certain to increase interest rates in its March 14-15 policy meeting. How will the Indian markets react to it? Are we discounting in a rate hike?
Market is always forward looking. No matter what US President Donald Trump or Fed Chair Janet Yellen may do now or later, gone are the days when we had to fear about flows going out of India. If we analyse data from last three months in terms of collections from Systematic Investment Plans (SIP) by different mutual funds itself, it has almost crossed Rs 4,500 crore, which is historically high.
I foresee a time in the future when we will not need FII investments as retail investments through the SIP route will go to record high levels. It would not matter whether the US Federal Reserve revises interest rates higher or lower, now or later. We have a strong growth story in our path and we believe that Indian corporates will deliver and so will the government.
Now that a stable government is likely till 2019 and there are also talks that PM Modi will have a second term in office, will foreign investors look to park money in India for long-term?
With 2.5 years still remaining for the present government in the saddle, it is bit too early to comment on this. However, if all fundamentals stay positive, funds will definitely flow into India, not just for the next 2.5 years, but for the next 10 years as well.
Of late, DII activity in the market has picked up pace. Will it sustain?
The domestic institutional investors have been buying because the net flow coming in through the mutual fund/SIP route is at a record high level. There have been instances of certain funds receiving overwhelming response in terms of inflows. You will have more retail investors participating in the Indian growth story through mutual funds/ SIP route. More money will come to the mutual fund kitty and they will be deploying large amounts of funds in the Indian equity markets by identifying pockets of opportunities.
What are the key reforms the market expects from the government in coming months?
Simplification of tax structure, much more ease of doing business, speedier approvals, implementation of GST and most importantly, clarity on certain clauses about foreign investment coming into India and repatriating it back.
Which sectors look promising for the year ahead, where should one book profits?
There are a lot of sectors which look attractive. They include banking, auto, IT, pharma, Oil marketing companies, FMCG, consumer durables, cement and steel. These are pockets where one can look at large-caps first and then mid-caps, after understanding about the particular companies you are investing in.
Your call on public sector banks in the backdrop of rising bad loans?
The government has made it absolutely clear about helping banks to recover bad loans. Certain bills, including the one to get the money back from one of the largest defaulting individuals now abroad, are likely to have positive impact on the recovery process. My sense is government will help out banks. At the same time, the government has also talked about consolidation in public sector banks, which is a step in the right direction. There are certain weak banks with weak balance sheets which need to be relooked and merged with larger banks to make them cleaner and leaner.
How much earnings growth for Nifty50 do you expect in the fourth quarter and FY18?
On a conservative side, a 10-15% growth rate is expected. It can also go higher, depending upon how the government policies are implemented.
What levels do you foresee on Sensex and Nifty for December-end?
It is difficult to quantify it numerically because a lot of reforms are expected to be implemented between now and December 2017. But, we foresee a newer high by the end of the calendar year.