Equities could shrug off note ban as a one-off period: Neelesh Surana

Interview with head - equity at Mirae Asset Global Investments (India)

With all eyes on the outcome of the US Federal Reserve meeting on interest rates later this week, NEELESH SURANA, head, equity, Mirae Asset Global Investments (India), tells Puneet Wadhwa individual investors’ appetite for equities could sustain. He expects corporate earnings to pick-up from the second half of the coming calendar year. Edited excerpts:

Your market outlook for the calendar year 2017?

We exit 2016 with a set of surprises, compared to the assumptions at the start of the year, which only highlight that predicting a one-year trend is difficult most of the time. On the global front, the year saw surprising strength in commodities and the world is now focused on fiscal-led reflation. Overall, the market outlook will be driven by the pace of the much-delayed recovery in corporate earnings. It should pick up in the second half of 2017, driven by consumption and exports, once the disruption caused by the currency replacement is over.

Can you elaborate your stance on growth in corporate earnings? 

Demonetisation would impact earnings significantly in the next couple of quarters, the extent of which is difficult to quantify. The impact of the fall in revenue on profits will be particularly severe in businesses with a high fixed cost to contribution margin. The markets could shrug off demonetisation as a one-off extraordinary period and focus on normalised FY18 earnings. While near-term earnings will be impacted, the impact on discounted cash flow valuation on many businesses might not be significant.

In which sectors and stocks do you see money-making opportunities over the next six to 12 months? Are mid- and small-caps a good bet?

Mass market consumption businesses where there is a large scope for a shift from the unorganised sector and select exporters offer decent opportunities. Mid-cap allocation should be balanced, say at 25 per cent, and the rest in large-caps. Alternatively, multi-cap funds are ideal, which typically have large-cap orientation and enough flexibility to invest in mid-caps. 

DIIs (Domestic institutional investors) have supported the markets, even as FIIs (foreign institutional investors) have sold over the past few weeks. What is the likely trend for the next few quarters?

Retail (individual) investors have maintained their faith in Indian equities, with the second year of record inflow. Their appetite for domestic equities could sustain, as there is increasing maturity to compare the favourable tax-adjusted return from equities over a long period versus alternative asset class. The near-term prospects of investments in financial assets are significantly boosted by the increase in savings from demonetisation, as a large quantum of idle cash will move to more productive uses.

What's your view on interest rate sensitive sectors in the backdrop of domestic and global developments?

Long-term view on rate sensitives, particularly those catering to affordable or mass market segment remains positive, notwithstanding the temporary impact caused by currency replacement.

With a return of around 27%, Mirae Asset India Opportunities fund has been able to handsomely beat the BSE200 index in a three-year period. Do you feel the need to change the investment strategy now? What about your consumer sector focused fund?

We maintain our investment approach which is to focus on quality businesses but up to reasonable price levels, and maintain a well-diversified portfolio. View on consumer sector is positive from a long-term perspective, although care should be taken to avoid pockets where valuations are high.

What are your advice to investors in the equity and the debt segment right now? Do you expect the returns from the debt segment by to be better than equities going in 2017?

Investors should follow a well-crafted asset allocation with balanced weight to equities from three - five-year viewpoint. While we expect interest rates to remain low, it's not appropriate to compare equity returns with a capital gain of debt funds which have done significantly well in last one year. Over longer periods, NAVs of most well-managed equity funds have given decent tax adjusted returns, and incremental Investment via SIP is recommended.