Use GST Bill passage to cut exposure to costly stocks: Saravana Kumar

Interview with Chief investment officer, LIC Mutual Fund

Markets have gained two per cent in the monsoon session of Parliament in the hope that the government will be able to secure approvals for the implementation of the Goods and Services Tax (GST) Bill. Saravana Kumar, chief investment officer, LIC Mutual Fund, tells Puneet Wadhwa that the markets expect the government’s reforms to result in higher earnings growth for India Inc. Edited excerpts:

Does the global equity rally have more steam left?

Continued expansive monitory policies have led to massive rallies in risky asset classes in search of returns. We believe a significant part of the capital in the developed world is parked at negative yields for safety purposes irrespective of their yields. Improvement in the macro-economic scenario would lead central bankers to increase rates and halt these rallies.

The US Federal Reserve (US Fed) mentions data dependence; however, actions seem decoupled from published data. As central bankers in the developed world – Federal Open Market Committee, European Central Bank, and Japanese central banks - reverse their stance on monetary policies, we expect strong volatility across stock, bond and currency markets.

What about India?

Markets typically factor in future opportunities and risks. Currently, we are in the middle of massive reforms; almost all major sectors of the economy are undergoing structural changes. The government’s efforts on infrastructure reforms are taking shape and can lead to creation of strong public capital assets. These capital assets would drive growth for next decade. These reforms are expected to deliver, resulting in high earnings growth. In certain sectors, these hopes would be realised and in certain sectors these hopes would falter, or take a longer time than expected. This anomaly is providing investment ideas at this juncture.

Should one use the passage of the GST Bill to sell given the sharp market rally over the past few months?

One can definitely trim positions that are overvalued. I always urge investors to not overact and keep longer term developments in check. One may be inclined towards taking profits home sooner than realising the true potential of the investment. However, if fundamentals keep improving in the sector, such ideas may continue to rally providing handsome returns. Volatility should be used to enter long-term ideas and rectify investment allocation.

What are the key things to look for this earnings season?

Major sectors in the economy are under stress and are due for recovery.

The banking sector is undergoing an interesting phase; loan impairment cycles might peak soon and the sector should see a strong revival.

Rural demand is another interesting facet to be watched out. Broad market earnings are expected to increase 14 per cent in FY17, whereas FY18 would see slightly higher increase coming mainly from stabilisation of the banking sector.

Are the markets already factoring in all the positives that are to accrue from a good monsoon and the impact of the 7th Pay Commission recommendations?

Consumer market in India is fairly large. Moreover, Indian consumer's tastes and preferences are different every few miles. This market is dogged by quite a few bottlenecks - like consumer affordability, consumer reach and inefficiencies in supply chain. Now with good monsoon and 7th Pay Commission benefits, consumer demand is expected to revive; significant part of consumer demand is still not aptly serviced with existing offerings.

There is enough white space in the portfolio offerings of the incumbent companies which may be addressed by innovations, introduction of low unit packs, streamlining warehousing post GST implementation. Success of Patanjali is a mere testimony to this ideology of enough white space in the market and lack of innovativeness / thrust from incumbents. Investors need to keep their eyes and ears open for such opportunities or risks.

What has been your investment strategy in the first half of calendar year 2016?

We follow fundamentals-driven bottom-up approach for investing. We do not take specific calls on sectors, though our calls are defined by our views on specific stocks. Prominently, we have been investors in a few names in metals, and public sector banks that have provided us decent returns.

Macro and micro environment is becoming more challenging and, hence, the road ahead would be volatile.

What is your view on the interest rate sensitive stocks – auto, banks and real estate – given the monetary policy expectations over the next few quarters?

At this juncture, we are hesitating from taking a policy-based stance on these sectors. Fundamentally, we are fairly positive on autos and banks. The auto sector might see triggers on the demand side. The restart of capex cycle after GST could lead to strong growth in banking credits. Impairments are likely to stabilise in a quarter or two. We have not been positive on the real estate segment since the past two years.