Diwali Special: Fund Managers’ View on Indian Equities

Arihant Team wishes you a very Happy Diwali!

On the start of new year, we ask Mr. Harrish Zaveri, SVP and Fund Manager at DSP BlackRock Mutual Fund and Mr. Sadanand Shetty, Vice President and Sr. Fund Manager at Taurus Asset Management Co. Ltd. their outlook on Indian equity markets, impact of global markets on India, their preferred sectors and their advice on investing in Indian equities.

Here are the intercepts from the interview:

Arihant: How do Indian equity markets look? The markets have been very volatile is there a need to worry?

HZ: We continue to remain constructive on Indian equities from a medium to long term perspective. Low inflation, which has resulted in lower interest rates and higher savings, will help to revive the consumption cycle along which along with a pick up in the investment cycle bodes well for equities.

SS: Historically market volatility has distorted the fair value of large number of companies irrespective of their fundamentals. Volatility is the best friend of genuine investors who has patience to hold through the business cycle of companies. Investments in such volatile period have rewarded investors disproportionately. Recent example of India’s large auto ancillary company with huge global footprint is a case in point.

If you look at the future of the market, we have stable government with majority in Loksabha. In our opinion what this government has achieved in short period of time is unprecedented. De-regulation of auto fuels, FDI in insurance, devolution of resources, plans to introduce bankruptcy code and potential amendments in labour laws will have far reaching impact on the economic growth of the country. Government is also comprehensively addressing issues of power, steel and banking sector woes with its policy action. Overall we are looking forward to a sustained economic growth of the country, which is a definite stock market positive. We are very positive on the market delivering substantial return to the investors.

Arihant:  How do you see the present situation in the developed economies and its impact on the Indian equity markets? 

HZ: We expect to see continued volatility in global markets mainly driven by the nervousness around the Fed increasing interest rates, China issues and slower than expected recovery in Japan and Europe. While this may certainly have some impact on emerging markets (EMs), India stands out amongst most of the EMs, and a few developed markets, on the basis on macro economic variables and a stable government focused on reforms.

SS: World economies are far too interconnected today than any time in the history. It is but logical to believe that economical upheaval of the large continents and nations will have impacts on the fund flows across the world. India being one of the biggest emerging markets and sizeable recipients of external funds through portfolio and FDI route, will see the impact on its currency, equity and debt markets whenever there is some development in global economies.

Global investors today are facing crisis on multiple fronts i.e. interest rate tightening by US federal reserve, Greece financial crisis and EU break up, Russia-Ukraine geo political conflict and the recent China slowdown.  Similarly world has witnessed sharp fall in crude oil and historic nuclear peace accord between US and Iran.  Most of these issues may still remain unresolved and continue to cause volatility in most asset classes, particularly in currency and equities. Investor in Indian equities will have to manage this global on-off risk matrix and more often than in our opinion it would be advantage India. We see global risk opening window of opportunities for Indian investors at regular intervals.

Arihant: What sectors would you recommend – which are very bullish and looks attractive to you?

HZ: We remain constructive on financials, discretionary, downstream energy, industrials while having a cautious view on consumer staples, information technology (IT), healthcare and telecom.

SS: We have entered new investment era where the themes are not restricted to traditional growth engines of the past. Though the themes of infrastructure, consumption, outsourcing and banking remains the core engines of economic growth but what is exciting is country has opened up to many new investment themes. The sustained fall and muted outlook of commodities especially crude oil has opened up stock ideas across tyres and paints, polymers, plastics, airlines, oil marketing companies and all other beneficiaries of commodity derivatives.

Advent of online commerce provide structural and fundamental shift to higher business growth to logistics, paper board and packaging companies. Rising digital ecosystem is significantly benefitting content, mobile data companies. We have observed material changes in some of the traditional sectors like defense, railways and road sector to create large scale sustainable opportunities for the investors.  Government’s efforts to resolve the issues in power, road, and other stressed sector will improve the ratings of this sector. Initiatives for creating large scale employment generation by Make in India and others like Swatch Bharat, Namami Gange, New Tourism Policy, New Aviation Policy, and Digital India are very positive steps. Implementation of even some of these could open up significant investment opportunities for the investors.

Interestingly most of the investment opportunities exist in companies that are outside the list of top Indian 100 companies.

Arihant:  What is your advice for Indian equity investors – especially retail investors, their participation has been low despite the market run up?

HZ: We do not believe that the markets are expensive when compared to historical averages. The markets have come off their March 2015 highs and are down around 12% from those levels. We would advise investors to add to Indian equities with a 2-3 year investment horizon.

SS: Today India has a stable government with absolute majority in the Lok Sabha. Stable government provides long term predictable environment for the business owners and this lowers the risk premium and volatility in equities. Indian economy will witness sustained growth in next several years and corrections are great window to buy into that.

Mutual fund industry has witnessed unprecedented in-flow of equity assets in last 14 months thus reflecting changing trend of Indian equity investments especially from retail investors. We expect this is here to stay and grow.

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