New Year ushers new expectations – let’s see what Mr Mahesh Patil, Co-Chief Investment Officer at Birla Sun Life Mutual Fund expects for equity markets in the coming year as he speaks to Arihant Research Team
Arihant Research: How was the year 2016 for Indian equity markets?
Mr. Mahesh Patil: 2016 was a phenomenal year! More things happened that never happened before.
Brexit and Trump triumph were low probability outcomes until the voting day. The results gave voice to the powerful majority that was unheard before. The central banks of ECB and Japan set policy rates below zero which took over a third of the developed bonds to sub-zero levels. The fall in oil prices prompted the OPEC and other oil producing nations to collectively agree on production cuts for the first time in eight years.
Closer home, a decade old effort to simplify indirect taxes found absolute consensus among all political parties to pass the GST bill. The government was bold enough to get the long standing bills like Real Estate (Regulation & Development) and Insolvency and Bankruptcy bills passed. It was bolder enough, in its continued effort to fight black money, to demonetise 86% of the currency in circulation – which no country in the world did in the past.
Arihant Research: What are your expectations from the global markets?
Mr. Mahesh Patil: Trump has three main agenda items – to cut corporate taxes from the current level of 35% to 15%; to spend USD 1 trillion on infrastructure and to facilitate companies to repatriate capital from abroad. As these measures are US growth positive, the dollar index rallied to breach the 100 mark decisively, the 10 year US treasury pulled back 75 bps to breach the yield of 2.5% which was tested earlier and the US equity indices have been touching new lifetime highs. The reality could be entirely different from expectations as Trump would have to build political equity for all the three agenda items.
China could continue to support investments in the economy through the quasi fiscal stimulus as it did last year. The weaker currency (depreciated 12% in 17 months), would help in exports. The soft landing is a work in progress for China. The comments and actions of Trump on China have to be closely watched.
Eurozone will have a politically heavy year with a possibility that far right parties could win in France and Netherlands. As these parties initiate process to exit Eurozone and European Monetary Union, markets could correct globally. Since this would be a multiyear process, markets could overcome the uncertainty.
We expect the brent crude to trade in the band of 55-65 USD/bbl as it is difficult to enforce production cuts and shale gas production becomes viable at the lower end of the price band.
World economic growth looks good with a strong US, a stable China and a stimulating Japan. The outflows from EM markets may continue in the near term due to strong USD. As valuations become attractive, the flows into EMs would reverse.
Arihant Research: Coming back to India, how do you think demonetisation has impacted our country? What are the expectations from Indian equity markets in the New Year?
Mr. Mahesh Patil: Due to demonetisation consumption has taken a setback for next 2-3 quarters impacting GDP to the tune of 100-150 bps in H2-FY17. Based on dependence on cash transactions and operating leverage, different sectors would be impacted in varying proportions. Some export oriented sectors or the ones in B2B segment are not affected at all. Just to quantify, among the Nifty companies, 43% (by weight) of companies in sectors like IT, Pharma, Oil &Gas and Power are not impacted. 53% of companies in FMCG, Auto, and Financials etc. may be impacted for less than two quarters. Only 4% of companies in Cement and Paints may see an impact for more than two quarters.
Following the effect of Demonetisation will be the implementation of GST. The businesses have to further readjust to the new indirect regime resulting in destocking and change in current operations. Though we see impact on growth in the short term, both demonetization and GST are immensely beneficial in the long run. The tax net would widen, tax compliance would improve, more banking services would be accessed and more businesses move into organized segment.
Development is not only an economic necessity but also a political one. Elections now-a-days are won and lost based on development. As government is aware of it and it is also aware that there has been a setback in the near term, it is imperative for it to prop it up. Cutting direct taxes, subsidized housing, rural development and building infrastructure could be the key focus areas for the government.
In the next two to three quarters, macro data and companies’ results could be volatile. However, as things stabilize in H2-FY18, earnings could recover. We expect the earnings of Nifty companies to grow at 19% in FY18 led by financials and autos.
The year 2017 will see lower bond yields and fixed deposit rates. It will see falling real estate and gold prices. It is equities that are providing a good alternative for investment with a medium term horizon. The valuations are reasonable and the base for sustained earnings growth is being set up.