Bubble in global bond market key challenge for India: Apoorva Shah

Interview with Executive vice-president and fund manager (equities), DSP BlackRock Investment Managers

Though Indian shares have jumped 25 per cent in a short period, there could be challenges ahead. The crisis in Iraq is already taking a toll on global shares, including Indian ones. Apoorva Shah, executive vice-president and fund manager (equities) at DSP BlackRock Investment Managers, tells Chandan Kishore Kant a bubble in the global bond market could be a key challenge for the Indian economy. Edited excerpts:

In terms of investment calls, has predictability increased with a new government at the Centre?

Not only is there a new government, there is a stable government, with a five-year mandate; it has a clear manifesto that it wants to follow. This increases the predictability of policy. To that extent, we can see an improvement in the macro environment and a revival in the economy. This makes it easier to project the trajectory of stocks.

Where will the markets stand in five years?

In the past five years, the markets have remained largely range-bound. Only recently have they come out of that range and are on the way up. Our economy has passed through various challenges in the past few years and now, it seems to be on the path to overcoming those challenges. A stable leadership at the Centre is expected to drive the economy to higher growth. The market's trajectory will be more predictable and substantially higher in the next five years.

Considering the current valuations, what would you advise investors?
Our advice to investors has been to remain in the markets and take asset allocation calls. If one looks at the returns in the past, there is a good chance there will be a reversion to the mean and the returns will catch up. So, we will say investors should look to buy. Even though market valuations have risen, they aren't extreme. We expect strong earnings growth to support these valuations.

Which sectors do you think are likely to (grossly) outperform?

We feel domestic cyclical sectors are the most likely to outperform. Given the change in leadership, an improvement in the business cycle and the likelihood of more effective policy making, it should create a pathway for growth of the domestic sector. This should include financials, consumer discretionary, utilities and infrastructure/capital goods and energy.

What are the key challenges for Indian stocks?

There is a bubble in the global bond market. Whenever that bursts, global bond yields will rise. If that process is not smooth, it will impact all markets, given the US is the source of capital to the world. So, that is a key challenge for the Indian economy. The other challenge is expectations of performance from this government have gone up significantly and now, delivery is awaited. While we are confident of the delivery coming through, it remains a challenge given the market is pricing in such a delivery.

Any economy could also face other challenges; the El Niño phenomenon and the possibility of a drought is one. Also, there could be geopolitical issues in our continent or elsewhere. These remain long-term risks for any business.

How do you plan to play defensives if there is a need for it?

Our approach will be stock-specific. The information technology (IT) sector is among the sectors that are the most attractive to us, given it is a global cyclical. It will benefit from resurgence in US economic growth. There are many world class companies in the IT space.

How could currency appreciation impact the performance of stocks and foreign institutional investment (FII) flows?

FII flows are positively impacted by currency appreciation, as the appreciation improves returns in dollar terms. However, stocks that are globally oriented and depend on exports or global markets tend to suffer during a sharp currency appreciation. So, that has implications on portfolio stock selection. IT, pharma and global cyclicals (companies that are globally oriented) tend to be affected.

What do you think about gold as an investment asset?

Gold has had a fantastic decade. To that extent, the base on which it has to perform is already very high, unlike equity markets, which have a very weak base. So, my bias is towards equity rather than gold. But these are global commodities, the movements of which are very difficult to predict. In case of currency debasement worldwide, the trend of gold might return, and that remains a risk we don't see as meaningful right now.

Do mining and metal stocks look attractive?

Indian stocks in the mining space look attractive because these have been suppressed by lack of policy action in the domestic economy or have been adversely affected by policy action. To an extent, that factor is being normalised and policy action is expected to be in place for improved business performance of the metals sector.

The stocks of private banks, one of the most preferred in recent years, have run up a lot. Is there more room for new highs or should one start considering public sector banks, which, too, have seen a significant run?

We think both have merits and both will continue to do well. Private banks will continue to do well because these are well capitalised and ready to take market share away from their public sector counterparts. So, these are high-growth stocks.

Public sector banks are ready to improve their valuations, which have been severely impacted by bad debt. Given the improvement in the economy, the risk of bad debt is reducing and there are expectations government policy will also consider the capital inadequacy of public sector banks. So, their outlook should improve. We like both — private and public sector banks.