 "Vineet Bhatnagar")
Investors are eyeing the outcome of the US Federal Reserve (US Fed)'s policy meeting on December 15-16 for its likely decision on hiking rates in nearly a decade. Vineet Bhatnagar, managing director and chief executive officer, PhillipCapital (India), part of Singapore-based PhillipCapital Group that has $33.5 billion in assets under management, tells Puneet Wadhwa that over the next year, he expects global markets to digest the US rate action and local corporate earnings to stabilise and gain momentum. Edited excerpts:
Do you see more allocation to emerging markets, especially India, by foreign institutional investors (FIIs) in calendar year 2016, once the uncertainty regarding the US Fed is over?
Yes, I would say in the overall investment allocation India should continue to remain high on the list of global funds with emerging market (EM) focus. Improved visibility on the external front, improving multilateral, bilateral relationship and ease of doing business should also keep interest high. Global concerns emanating from US Fed lift-off and overall slower growth are likely to persist. With low commodity prices, India should, however, do relatively better. Insofar as an imminent rate hike by US Fed is concerned, I would say the markets appear to be better prepared now.
What are the key concerns foreign investors have on India? Are there more triggers for a downside than an up-move?
The key concerns for FIIs are three folds. One, the impact of an external slowdown and US interest rate liftoff; two, delays in decision-making due to political reasons; three, weak corporate earnings. While the global concerns are, to a large extent, getting reflected in the local currency, we have seen some movement on the reforms front after the recent state election results. Corporate earnings will take some more time to pick up as the overall demand scenario is still weak.
We expect global markets to digest US rate action and local corporate earnings to stabilise and gain momentum over the next year, as the government's initiatives take shape and the overall economy does better. There could be volatility in the short term but we would use sharp corrections as an opportunity to invest.
Is there a general sense that the Narendra Modi government hasn't done much to kick-start growth? How do you expect the markets to react to a couple of more sessions of logjam in Parliament?
Market sentiments are more aligned now with political realities. With the government making more determined efforts in the past few weeks, investors would be keenly watching for the outcome. Markets don't like uncertainty, and hence, a period of prolonged logjam could dampen sentiments.
We expect the government to keep taking decisions on the policy front through executive route, as seen recently. The government is doing the right things in maintaining fiscal discipline and focusing on structural improvements. Structural improvements take time to show results, but are more sustainable over the long term.
Which sectors and stocks have you been overweight and underweight in the Indian context in 2015 (large-cap)? What is the strategy for the next 12 months?
We are overweight on financials, infrastructure, automobile, pharmaceuticals, telecom & media, which continue to witness robust traction. We are underweight on consumer sector because of stretched valuations and deflationary environment in many product categories. We are also underweight on metals and oil and gas. The first and second quarters of FY17 should see significant pick-up in both corporate earnings and investment cycle.
Would you bottom-fish in the banking, metals and capital goods sectors or would the next six months give investors a better opportunity? What is your view on policy-driven sectors like aviation, telecom, infrastructure and real estate?
Credit growth is at the bottom of the cycle and will see a pick-up next year. The time is ripe for bottom-fishing in banking sector. In metals, cash on books and valuations are supportive but news flow tends to remain not so encouraging. So, we will avoid metals at this stage.
Capital goods is not a candidate for bottom-fishing at this juncture as valuations are still not that conducive. Infrastructure is a key focus area for the government and would also benefit from lowering of interest rates, which can be played through the logistics sector. Aviation is doing well, as we have seen in the recent initial public offerings.
Mid-caps have attracted a lot of investor interest since the past few months. Will 2016 be a year of the mid-caps?
In a fast growing, large economy like India, mid-caps will always remain interesting. But, 2016 may not be a year of mid-caps as quite a few large caps are now reasonably valued, especially in the financial sector.
Do you think that the pay-out of the 7th Pay Panel will have any impact on the consumption story? Which sectors and stocks do you expect to benefit the most and by when is the benefit (if any) likely to kick in?
Yes, we believe consumption will jump by around 80-100 basis points (bps) because of 7 th Pay Commission; and the categories that should be most positively impacted are discretionary consumption categories such as two-wheelers, foods, restaurants etc.
How long do you expect crude oil prices to remain soft? Are the oil marketing companies - HPCL, BPCL and IOC a good investment bet in this backdrop? What about RIL and ONGC?
It is difficult to call Crude prices but looking at the weakness in the global growth, especially China, a large up move looks distant. In terms of investment we advise having a mix of Upstream and Downstream companies.
