 "Sampath Reddy, CIO, Bajaj Allianz")
Gains from lower commodity prices is one of the factors that drives earnings growth. Sampath Reddy, chief investment officer of Bajaj Allianz Life Insurance, which had assets under management (AUM) of Rs 44,107 crore as on March 31, 2016, tells Puneet Wadhwa that this year, most of the growth will come from revival in commodity prices such as metals and reversal in asset quality problems for the banking sector. Edited excerpts:
What could be the next big trigger for the Indian markets? What are the key risks?
Revival in the profit growth of India Inc and passage of goods and services tax (GST) Bill are the near-term triggers that will drive our stock prices. For the current financial year, the earnings are likely to grow at 17-18 per cent, of which most is back-ended. Crude oil prices rising beyond $60 a barrel and the government failing to push through the reforms in the light of impending state elections could hit growth.
Can you elaborate on your expectations for growth in earnings?
While gains from lower commodity prices are among the key factors driving earnings growth, this year, most of the growth should come from revival in commodity prices such as metals, and reversal in asset quality problems for the banking sector. Oil marketing companies (OMCs) are also likely to do well, led by inventory gains and good marketing margins. Also, consumer durables and white goods companies have been showing sustained demand improvement. During the fourth quarter of FY16, some companies in the infrastructure sector showed improved performance. We will be watching for signs of an improvement in the first quarter of FY17, to increase exposure to this sector.
Which sectors and stocks, in your opinion, could be the next to trigger for the market?
Commodity producers such as aluminium and steel makers could continue to do well, as the valuations in the sector are attractive. The government is also helping the sector by making imports expensive (by imposing anti-dumping duty). With the overall lower inventories, and China’s moderation on capacity addition, commodity prices are likely to remain firm. Private banks and non-banking financial companies (NBFCs) continue to grow well and maintain the desired asset quality. With the huge upfront spectrum costs and interest burden, consolidation in the telecom sector should to pick up pace, and this sector could turnaround soon.
What has been your investment strategy in the first half of calendar year (CY16)?
We have increased our exposure to the metals sector, and private banks and NBFCs during the past six months. Though road infrastructure activity continuities to be at an all-time high, driven by a large amount of orders by the government, the companies in this space have not been able to show improved financials owing to higher competition and low entry barriers. We have lowered our exposure to this sector. After two years of poor monsoons, rainfall this year has been good so far. As a result, we could see companies with rural sales do better this year.
iven the outperformance of the mid-cap and small-cap segment since February, do you still find value here?
Mid-cap companies in the past three years have done well in anticipation of quick growth revival. Usually, in the economic upturn midcap companies tend to outperform large cap companies, as the former could see much faster earnings growth in the upturn. Given that valuations are higher for midcap companies, we tend to prefer the large-caps with good liquidity.
What are the markets expecting from the Reserve Bank of India’s policy review in August?
We expect at least a 25 basis point (bps) cut in repo rates in the second half of FY17, with an upside bias of a 50 bps cut, owing to expectations of a more dovish RBI governor candidate and good monsoons. Markets have largely factored in a 25 bps rate cut. RBI’s stance of getting liquidity to neutral zone augurs well for fixed income yields. We expect the 10-year yield to fall further from current levels to 7-7.15 per cent in the coming months.
