 "India could continue to witness increased FII inflows: Kunj Bansal")
In the midst of the US Fed maintaining status quo on interest rates Kunj Bansal, ED & CIO, Centrum Wealth Management shares his views with Tulemino Antao on the markets, RBI policy, FIIs and second quarter earnings and the broader markets. Edited excerpts:
What is your call on US Fed's decision to keep rates on hold and the impact on foreign fund inflows into emerging markets especially India?
The decision by US Fed to keep key interest rates unchanged in the recent policy was more to do with global issues rather than domestic ones. While the US economy is on the recovery path, key emerging economies especially China and some of the European countries are facing challenges.
Although a rate hike could have helped in removing the uncertainty and the resultant volatility in the equity markets, a steady rate would keep funds flowing into emerging opportunities. For India, this means that we could see higher interest from FIIs as they see limited investment opportunities globally. China is facing several headwinds so are other emerging countries like Brazil, Russia, etc. Indian economic growth is forecasted to be among the highest over the next couple of years even surpassing China in 2016-17. Further, the recent correction in Indian equity markets makes them attractive in terms of valuations. Hence we believe that India could continue to witness increased participation from FIIs.
What could be RBI's stance post the US Fed's decision despite encouraging macro-economic data on industrial growth and consumer price inflation?
While US Fed has decided to keep their rates steady, there is an increasing pressure on RBI to cut interest rates. The domestic inflation is under control, WPI has been in negative territory for the last 10 months, while CPI has been under 4% during July and August 2015. Further, the low crude oil price has helped cut India’s import bill leading to lower fiscal pressures.
While the overall monsoon till now has been lower than the long term average, the distribution has been manageable with almost 55% of the country receiving normal to excess rainfall. The below average rainfall has also been factored into prices and is no longer an uncertainty. Another factor cited by RBI last time was not enough transmission of rate cuts by banks to customers. This has also started with some of the large banks reducing their lending rates by 10-35 bps during the 1st week of September. Hence we believe that most of the conditions set by RBI are turning favourable for a rate cut.
Of late there has been selling pressure from foreign funds while domestic institutions remaining buyers at lower levels. The SENSEX P/E and NIFTY P/E is around 18.5 on a trailing basis what could be the trend for the market for the calendar year 2015?
We expect the Indian Equity market to remain range-bound in the immediate future. The US Fed rate hike is still pending; monsoon has been lower than average and corporate result expectations are mixed. The FII selling and withdrawal of money by them from across the emerging markets and happened due to global volatility and not necessarily only due to India specific issues.
We are nearing the end of the second quarter. What is your outlook on earnings growth for Sensex companies for the quarter?
Large cap companies in the Sensex are likely to see lower single digit growth in Q2 as the overall demand environment is yet to see a good pick up. Although there are pockets of growth, the overall scenario is expected to be weak.
Are the valuations of bank shares compelling at current levels. What is your call on the banking sector in the wake of the recent issue of licenses to small finance banks by the RBI?
The Banking sector is witnessing the lowest credit growth in last 10 years, resulting in lower profitability growth and increased asset quality issues. This has led to the correction in valuations of banking stocks especially in the PSU space, which are currently trading below their respective book values.
While the valuations for PSU banks have become attractive at current levels, we believe that private banks would continue to outperform them given their focus on business growth, diversification in loan book and adequate capital compared to PSUs which require higher capital infusion (due to higher NPAs and provisioning). The small bank licenses issued by RBI are mainly in the direction of financial inclusion and would go on to improve the availability of finance to the unbanked rather than the competition to existing banks.
What is your take on metal stocks in the backdrop of weak economic data from China, the world's largest consumer?
The overall demand scenario remains weak for metal companies and so does the pricing. As a result, metal stock are likely to continue to underperform in the immediate future. However given the attractive valuations – if somebody wants to take a contrarian call without any specific time frame in mind – this is a good time.
What benefits do you see panning out for export-led sectors such as IT and pharma with the rupee depreciating against the US dollar to near Rs 66 levels?
The depreciation in INR is directly beneficial to export led sectors as not only it leads to higher realisation in revenue, it makes them more competitive globally, leading to higher demand. While there has been some slowdown in IT demand globally, pharma sector continues to outperform with good growth every quarter.
Which sectors would you avoid at the current juncture and why?
We would be cautious on sectors like real estate, metals & mining, PSU banks, telecom, utilities, oil & gas, cement. Most of these sectors are currently witnessing a slowdown in demand leading to lower realization and decline in profitability
Activity is also seen in the broader market. What is your outlook on the Mid-cap segment and which could be your top three picks for a 3-year holding period?
While the broader indices (Nifty & Sensex) have corrected in last few months, there have been few mid cap stocks that have been consistently outperforming by reporting consistent growth every quarter. We believe that select mid-caps could continue to outperform their large-cap peers, due to their lower size and ability to adapt and react to the changing environment.
