Financial markets across the globe are now looking to the US Federal Reserve for a lift-off in interest rates. Vaibhav Sanghavi, managing director, Ambit Investment Advisors tells Puneet Wadhwa that though this event could see a risk-off phase across various asset classes, the duration will be short-lived. Though the markets might remain volatile in the short-term, they look promising from a long-term perspective and have fairly factored in domestic concerns, he says. Edited excerpts:
We now know the likely course of action of the US Federal Reserve and the Reserve Bank of India (RBI) in terms of outlook for interest rates. How do you see this impacting the markets over the next one year?
We are in a far better situation than what we were earlier in terms of our macros. We are looking at very manageable CAD (current account deficit) and fiscal deficit, highly comfortable forex reserves, well controlled inflation and an easing interest rate environment along with bottoming out GDP (gross domestic product). This gives huge comfort on dealing with any potential global shocks like US Fed rate hikes.
India is a standout country in the emerging markets (EMs) basket. Having said that, the markets would face some turbulence and volatility on the event as various asset classes globally may see a phase of risk-off, including emerging market equities. But it might be short-lived. Our Nifty target is 11,000 for 18-24 months.
What about China and the euro zone and their possible impact on emerging market equities, including India?
In our view, the quantum of slowdown in China is reflected by the weakness in the prices of commodities. On the euro zone, we have seen temporary respite from problems in Greece. Global markets are in for volatile times across asset classes as Fed rate hike looms, including emerging markets. Within the emerging market basket India is best placed and will see relatively increased allocations. While all the emerging markets are likely to have a knee-jerk reaction, India among them will be the quickest one to recover. It's going to be extremely volatile in the short-term while on the longer term, it looks extremely promising.
Have the markets fully factored in domestic concerns such as the monsoon, participatory notes (P-notes), outlook for interest rates and slow pace of reforms?
We need to first understand what reform means. In our understanding, a lot of reforms have taken place and more are yet to come. It's always work in progress. The only difference is the relative pace at which one would want them to happen.
Coal auctions, fiscally prudent policies, steps towards digitisation and ease of business, oil and gas sector reforms, insurance and coal bills and improved thrust on capital expenditure are part of those reforms which have happened. However, we still seek lots of rationalisation on taxation (income tax), along with the Goods and Services Tax and land reforms, to happen and we look forward to that.
Regarding P-notes, in my view it is not an issue, as better disclosures are always welcome for longer term health of the markets. The monsoons is close to normal and outlook for interest rates is still downwards. The markets, in my view will take a leg up once the corporate earnings start to improve, which currently is the concern. Otherwise, markets have fairly factored in on the above concerns.
The current monsoon session of Parliament will be a washout. How long the foreign institutional investors willing to wait for the reform process to start? Do you expect a pull-out of funds over the next six to 12 months?
India is well-placed in terms of demographics, democracy and development. It would be tough to ignore a country which would be growing close to eight per cent a year with broader macro parameters very stable. There is no denial that there can be temporary bouts of selling or profit booking by the foreign investors depending on the global risk on and off phases, however, for a longer period of time I expect the interest of foreign investors to remain high in the light that reforms have happened and lot more are yet to happen.
Which stocks or themes do you like in this market and expect to play out well over the next one year?
We, like industrials, consumer discretionary, including automobile and auto ancillaries, financials and niche opportunities in pharmaceuticals. In case of commodities, our bigger worry is China slowdown and we think that recovery will not happen in the immediate future. Optically the valuations might look cheap, but we are refraining from investing. The underlying thesis of our investment is to choose companies that have the capacity to grow in an upturn in the economy and that would be those with a strong balance sheet.
What is your outlook for the automobile segment, especially the four-wheeler pack in light of the July sales figures and the road ahead?
We are in a unique situation where 65 per cent of the population is below 35 years of age and at the same time the income levels are rising. We are witnessing rising aspirational levels. It augurs very well for the whole consumer discretionary sector along with automobiles. In the current scenario, we are bullish on four-wheelers and commercial vehicles, because of economic recovery, better infrastructure in terms of roads, decreasing oil prices and interest rates and potential GST benefits. On two-wheelers, the sector is witnessing huge competition and to see a recovery we will wait for the rural economy to pick up meaningfully before we venture in.
What are your estimates for corporate earnings growth in FY16 and FY17? What are the key risks to these estimates?
The current result season is soft and is on expected lines. We are estimating about 12 per cent earnings growth for FY16 and in excess of 20 per cent for FY17. The key risk to these estimates is slower than expected pick-up in economic activity resulting in slower GDP growth.
The July manufacturing PMI hit the fastest pace in six months. However, Larsen & Toubro's results for the recently concluded quarter came in as a disappointment. Is the case for investing in manufacturing-related sector stocks still weak?
We are bullish on industrials and are of the view that the recovery in earnings will be back-ended. What we are positive is that the companies have started to increase their order books on back of capital expenditure by the government. We also believe that the private sector will follow suit as their capacity starts getting utilised. It also fits in well with the 'Make in India' push by the government.
The second half of 2015 is likely to see a lot of fresh issues, follow-on offers, etc. Is there appetite for fresh paper in the retail and the institutional segments? Issues from which sectors do you see doing comparatively well?
There is surely a good appetite from all segments of investors, right from retail to domestic institutions to foreign investors for companies with good growth prospects. In terms of sectors, we would be keen on companies on domestic growth.
Ambit Alpha Fund crosses Rs 500 crore in assets under management. What has been your investment strategy? Do you expect more takers for this fund given the market outlook?
Ambit Alpha Fund is a fund with the objective to generate absolute return and thus we are not benchmarked to any index. We thus do not have the compulsion to remain invested even if we do not like the market in shorter term.
Our recent strategy has been in-line with our view that markets are in a volatile phase. In a very volatile phase our cash levels usually go up and which is what we have done in past few months with the intent of protecting capital as prime objective. The fund has got very positive interest from investors across HNIs, family office and corporate treasuries who are looking for risk adjusted absolute return strategies like us.