At a time when Indian markets have been grappling with global issues related to China, Greece and the possibility of the US Federal Reserve (US Fed) raising rates later this year, developments regarding participatory notes have shaken investor's confidence.
Chandresh Nigam, managing director & chief executive officer, Axis Mutual Fund, tells Puneet Wadhwa that despite the headwinds, investors should prepare for a big breakout of this range, which can happen over the next 12-24 months. Edited excerpts:
Do you think the markets are over-reacting to developments in China, Euro zone and rate hike by the US Federal Reserve?
While we get impacted by these global events, markets will eventually react to what's happening to the companies back home and earnings growth trajectory. So, while we reacted to Greece, which I don't think was a big issue for Indian markets, we haven't reacted much to China - and that is a bigger issue and can have a bigger impact on the markets.
Should slowing growth send alarm bells ringing on the Indian markets and economy?
I don't think things have happened the way we hoped. The expectations were higher, though the government has done a few important things. We expect a lot more to happen - the land Bill and the GST (Goods and Services Tax) Bill. Once all these things happen, there is a rational expectation that the pace of economic growth will accelerate and the markets will head higher.
The general sense is that we should be able to break out of the current range. But, we need to see reform measures being implemented before this. While the global developments have been negative, the markets have been finding reasonable support at lower levels. The reason for the support is simple - there is an expectation that the reforms/policy measures will happen and globally there are not many investment alternatives beside India.
For the next one year, should investors scale back their return expectations?
I think investors should prepare themselves for a big breakout from this range, which can happen over the next 12-24 months. Whenever that happens, it will be a significant move. We will get higher economic growth, and when that happens, operating leverage will kick in that will boost corporate earnings.
How big will this up-move be?
A revival in growth should provide a significant boost to corporate earnings. I think getting back to a 20 per cent growth rates in corporate earnings over the next two to three years should be possible. If we can sustain that kind of earnings growth over a five-year period and from a starting valuation today that is reasonable, a significant part of that earnings growth should flow into market valuations. Thus, we are extremely bullish on equity markets from a medium to long term perspective.
Could there be a risk-aversion phase?
I think that phase is coming right now. Having said that, there are so many participants that have not come into the markets till now. Investors, local and global, are waiting to get into the markets. If the present government is not able to deliver and investor faith is shaken, there will be a flight to other destinations. I don't think that's happening and overall conditions are in our favour. If we do only a few things right in terms of policy, there is a lot of money waiting to come in.
But these few right things have been hard to come by.
Yes, I agree. But then a lot of other reform / policy measures have been implemented. While the markets had been expecting too much in terms of the pace at which things will happen, on a rational basis, we all knew that some things will take time to fructify. Given the mandate, the right things will happen. India is a democratic country and one needs to work with the Opposition parties and the Allies to get things done. Over the next 12 – 18 months, we will see a lot of these policy measures being implemented.
Do you think developments regarding participatory notes (P-notes) could see foreign investors pull out from the Indian markets in the immediate term or withhold fresh investment?
This bogey has been raised quite often and those really worried about this have probably already unwound those positions. P-notes' investment would be 20 per cent of the total market investment and a lot of this would be genuine as well. We don't need to worry about that much at this stage and it will be good for the markets if this bogey gets over and done with once and for all.
Do you expect a rate cut in the upcoming policy review?
I don't think there will be one. The Reserve Bank of India governor would like to wait for the US Fed, a possible impact from El Niño, etc. I think December is when we expect the RBI to relook at rates.
Have you used the recent correction to increase exposure to equities? Which sectors have been on your shopping list?
Since past two years, we have been investing in stocks where we thought that the companies will continue to grow at a reasonable pace despite a lack of growth in the economy. This process continues even today. We want to get into high quality businesses which are more cyclical in nature and will witness a significant operating leverage kick in when the economic growth picks up. This includes capital goods, banks, automobiles etc. Our allocation to these sectors has been increasing and it will take another six – nine months till we get to an optimal exposure to these sectors to play the upcoming growth in the economy over the next three years.
Are the markets factoring in the worst in terms of upcoming State elections?
I think an unfavourable verdict may have an impact for a week but nothing beyond that.
Do you see investors’ appetite for follow-on offers (FPOs) / initial public offers (IPOs) reducing in the second half of calendar year 2015 (CY15)?
There will always be an appetite for good quality offers. Some of the offers which have come have been aggressive in terms of pricing. So now there is no real euphoria for IPOs. Anything linked to technology, consumer demand and the sectors where India has a significant competitive advantage globally should do well. With the markets having moved up so much, we haven’t seen much IPOs as they should have been.
Are the days for the debt segment over?
Our view is that while there has been a sell-off in bonds, the long – term bull market in bonds is still alive. Over the next six – eight months, we should see a couple of rate cuts of 25 basis points (bps) each. Global commodity prices are softening and inflation, too, doesn’t seem to pose a risk. The local economy hasn’t grown much to put inflationary pressure.
What about gold as an investment? Is the time right to add or should one defer the purchase for some more time?
Gold, I believe, is never an investment – it is an insurance. I think each household should have 5% - 6% allocated to gold in their overall portfolio as an insurance. Since the prices have dropped, one can look to add it and rebalance the portfolio.
You recently launched Axis Equity Saver Fund. Can you share some more details about the product?
This is a multi-asset open ended equity scheme which would endeavour to generate capital appreciation and income distribution, by investing in multiple asset classes - equity, hedged equity (arbitrage opportunities) and debt. The fund can invest a maximum of 45% in equities (unhedged) and the balance allocation is spread between income generating assets including fixed income and arbitrage.