To discuss the Fed rate hike and more, Bloomberg TV India spoke to Saurabh Mukherjea, CEO - Institutional Equities at Ambit Capital.

What are the implications of the US Fed rate hike?

Life will be very similar over the next year and year-and-a-half, similar to what it has been over the past year, year-and-a-half. As you see the trend here, risk asset classes have sold off relentlessly in the last 18 months, whether it is junk bonds, commodities, emerging market equities, hedge fund asset flows, etc. I think it is reasonably clear that as American monetary policy gradually normalises after the heart attack that was Lehman Brothers in 2008, risk appetite will normalise in America and that necessarily means reduction of flows into risk asset classes. So the journey that began when the QE stopped around a year-and-a-half ago, that journey continues and that means outflows out of risk asset classes including emerging market equities and including Indian equities. I think FII outflows in equities look to be certain over the year.

Take us through the latest report that you have actually put out.

There is no point getting too obsessed about economic growth in India. Economic growth in India actually isn’t that bad.

Even if you take the CSO numbers with a pinch of salt, overall economic growth is at a reasonably healthy level. The challenge is earnings growth. We haven’t had earnings growth for the last 4-5 quarters and my reckoning tells me we are not going to get double digit earnings growth for at least another year and a half. That necessarily raises the question why do we have an economy where overall growth isn’t too bad but large components are simply not able to benefit from it?

The point we are making is that our Prime Minister, central bank Governor and technology are fundamentally changing the country. It is eroding the power of large corporates to extract profits from economic growth and that change is very similar to what we saw in 1991. Between the middle of 1991 and 1994, there was hardly any earnings growth, although economic growth was healthy and I think we are in a very similar phase of that moment.

In that sort of circumstance you’ll see single digit returns from the frontline index, and high churn in the frontline index.

I reckon at least half of today’s Sensex components will no longer be in the Sensex 10 years out. And that too is a very conservative prediction, the churn could be even higher. The way to make money in the market is selective stock picking in small and midcap.

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