The market appears to be getting ahead of its fundamentals, as structural improvements in the economy have not translated into earnings growth in the past two to three years, says Ravi Gopalakrishnan, head-equities, Canara Robeco Mutual Fund. He tells Ashley Coutinho earnings growth will pick up once the benefits of reform initiatives accrue. Edited excerpts:
Your outlook for the market?
Indian equities have been in a bull phase for some years. Unlike earlier times, not a runaway rally and accompanied by high volatility. This has been primarily on the back of a structural and steady improvement in the economy, be it low inflation, low fiscal deficit or steady growth.
The market appears to be getting ahead of the fundamentals, although it is nowhere near bubble valuations. This is mainly because structural improvements in the economy is not getting translated into earnings growth in the past two-three years. Further high domestic liquidity is flowing into mutual funds as a preferred asset class, compared to the more traditional asset classes such as bank deposits and real estate. So, while the markets could in the longer term see a sustained rally once earnings growth picks up from the second half of FY18, in the short term there could be bouts of volatility, depending on the liquidity scenario.
How concerned are you about market valuations?
As I said, given that earnings growth has been benign, valuations appear stretched. However, once the benefits of reforms start to accrue, earnings growth will pick up and valuations could appear reasonable. Many businesses will benefit from the series of structural reforms the government has initiated. For example, GST (goods and services tax) will help organised players take away market share from unorganised ones. Sectors such as building materials and companies in the consumer sector could benefit. Similarly, companies providing logistics services. Non-bank financing companies and insurers could also see market share gains.
How difficult has stock-picking become for value investors?
We continue to believe the Indian markets are in a sweet spot and offer a great opportunity for domestic investors to create long-term wealth. Indian capital markets could benefit tremendously from the long-term positives offered by its demographics, conducive macro economic environment, improving corporate earnings and government-supported initiatives towards financial inclusion and tax reforms, though with volatility.
For investors, it is advisable to invest with at least a three to five year horizon and use every meaningful decline to increase the allocation to equities. Doing so will smoothen out the volatility in the markets over time. We believe ‘time in the market is more important than timing the market’. Investors should focus on asset allocation, instead of looking at absolute benchmark levels, when making an investment decision.
Will domestic MFs' buying spree continue?
While it is very difficult to predict flows, over the near term, concerns surrounding low earnings growth and weak macro economic data could influence liquidity, particularly from foreign portfolio investors. On the domestic front, the lack of attractive investment opportunities elsewhere and under-investment in equities (only about four per cent of financial assets is invested here), could lead to more flows into these.
Your expectations from the September quarter results?
These might not be substantially different from what we saw in the earlier quarter, perhaps worth some improvement. With the impact of GST behind us, there has been some recovery in the sectors that saw a significant destocking impact ahead of GST. There could be some sectors where one can expect positive surprises — energy, metals and financials, in particular.
Global cues to watch for?
Developments surrounding North Korea will always be something to watch for, as it can have far-reaching economic implications worldwide. Geopolitical uncertainties are something markets do not like and, hence, any negative development will impact stock markets globally, including India. The trend of rising interest rates in the US has been, to some extent, discounted by markets. There could be some short-term volatility whenever the US Fed does increase rates.