While 2015 disappointed investors, analysts see low valuations in some sectors offering better opportunities in 2016. Bloomberg TV India gets a 360 perspective of the market from a power-packed panel comprising Manish Gunwani, Senior Fund Manager at ICICI Prudential AMC; Tushar Pradhan, CIO of HSBC Global Asset Management India; and Sampath Reddy, CIO of Bajaj Allianz Life Insurance. Excerpts:

2015 has been quite a bumpy ride for global markets. What do you make of the outlook for 2016?

 Gunwani: Much of the destiny of Indian markets lies in the global markets, because if you see commodity prices and EM currencies, they are at an extreme today.

If we see some stability in commodity prices and an upward movement in EM currencies at a much more stable level, we are then set up for a reasonably decent year.

Both in terms of valuations and macro economy, I think India is fairly attractive.

We have an attractive price to earnings (P/E) of the market in about 15-16. Slowly, we expect that lower interest rates, government spending and the private consumption will hold strong.

With these drivers in place, the economy should pick up. In that sense valuation is okay and we will have a much better year.

What is in store for markets in 2016?

Pradhan: 2015 began with expectations of reforms. As we got muddled in the interim as to how it got translated, the markets lost interest.

Most of the FII’s outflows have been pretty strong. International investors more or less forgot about Indiafor a while. Earnings in 2015 have not really been very strong.

So, there were a lot of reasons for earnings to be downgraded. 2016 looks pretty much bleak compared to what we expect next year. Revival in earnings is likely to happen by mid-FY17 and the economy is also set to turn around.

What’s your reading when it comes to the macros you would be watching out for, in 2016?

 Reddy: FII flows were because of the expectations of the Fed rate hike. FII flows are really important not only in the backdrop of the Fed rate hike and the pace of it, but also in respect of pick-up in corporate earnings. I think patience of FIIs may come down, which would lead to continued outflow. Domestic flows continued to be very good, which is a positive trigger for the markets.

Banking is an important sector. We have seen a lot of strain when it comes to asset quality. How are you approaching the banking sector?

 Gunwani: One of the themes we are looking to play is the movement from physical savings to financial savings and falling interest rates. Banking and other financial services fit into that theme. It’s a multi-year theme because of the increase in financial savings and the incremental macro being better.

How are we playing with respect to the banking and the financial space?

 Reddy: In the last 5-6 months, we have preferred private banks. Within the private banking there has been more focus towards companies having more of retail credit growth. If you look at the overall credit growth that has been 9-10 per cent last one year, most of the growth has come from the retail credit side. Corporate credit growth has been muted as it continues to be bogged down by NPAs. We prefer private banks more secured towards the retail side.

How are you approaching the sector?

 Pradhan: Public sector banks trade at much significant discount to their book values and private banks trade at multiple of their book value because the balance sheet is stronger and hence access into the markets is much better. Private banks are in a better shape but from investing prospective that is pretty much uniform. While the environment looks in favour of private banks, there might be opportunities across the spectrum. 

We hope to see government spending growing and expect the private capex to pick up as well. Will industrial and engineering be a themeyou would focus on?

Reddy: Yes, they are sectors one can look at, especially the road sector, as it continues to attract a good amount of spending. One can build a good portfolio in the road construction space and that is going to be the key driver of the earnings growth for next year. Other sectors are yet to see recovery in earnings. They would probably show recovery in the end of next financial year. By then, we can see growth coming in capex. One should look at stock-specific ideas in the capital equipment space.

What could be other reforms in the power sector?

 Gunwani: We are at a cycle now. In the early part of decade, we had lots of commissioning of power generation and now have a surplus. But 3-4 years down the line what is likely to happen is that if the secular demand for power keeps going up you will find power generation capacity to be in shortage. There are spaces in that power value-chain, which offer attractive investment opportunities now.

The top sectors that you are overweight on for 2016?

Pradhan: I think we will continue to remain a wary of real estate, and utilities to a certain extent. I think the bright spots are in banking, financials and consumer discretionary and to a certain extent in manufacturing.

What kind of weightage will you be looking at when we talk about sectors and themes for 2016?

Reddy: We will actively look at the metal space. For instance, that is one, especially , in which the valuation is very attractive. Some companies are trading below the book value and significantly below the replacement cost.

I think that sector could look promising in a period of 2-3 years prospective. We certainly believe that aluminium prices will rebound. Global majors are taking steps to curtail production given the current weak demand.

All of these could probably lead to pricing recovery in the aluminium space and that sector could really be benefited in the long term. This is one sector we look to invest actively in.

The other side is consumer discretionary, especially the appliances side. The demand continues to be very good. Most of the products are no longer luxury products and have become a necessity. That space will continue to see a very good growth in demand. Also, beneficiaries of low commodity prices like auto, auto ancillaries and paints are going to see a very good margin expansion. Also, from the valuation perspective IT sector looks attractive.

Your thought as well when we talk about sector strategy?

 Gunwani: We still have a tilt toward cyclicals like BFSI space, consumer discretionary and auto. We have invested in some part of oil and gas and some metals because the valuations are really attractive.

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