Despite challenges and headwinds, Indian equity markets will continue to do better than other asset classes, according to Rajat Jain, Chief Investment Officer at Principal PNB Asset Management Company.
The AMC with portfolio size of ₹6,500 crore, including equity investments worth ₹4,000 crore, is positive on domestic cyclicals like automobiles, cement and financials (mostly private banks). Excerpts:
Markets have had a very strong run-up in the last three-odd years due to more investor appetite for equity, led by macroeconomic factors, such as lower interest rates (globally and in India), and improving macro stability.
This pace cannot be sustained as broad earnings have not come since some or the other sectors faced issues. Earlier, it was metals and energy followed by financials. Now, it is information technology and pharmaceuticals.
In other words, only a few sectors have done well. While markets will do reasonably well, it will be lesser than the past. But markets are now hoping for overall earnings growth to come in the next few years.
What will happen in the run-up to the next general elections?
Politics is an important event; but this time earnings improvement is more crucial. Of course, there is some impact of politics like ease of doing business.
But we have seen lower interest rates, and stable rupee, which have not been due to politics.
When do you see earnings growth taking place?
I see substantial earnings growth improvement in FY19. First half of this financial year has not been great. Things are generally looking better economy-wise. December should be better, though not substantial. Rural demand looks good, while urban consumer is holding up.
Earlier, markets used to correct when earnings were disappointing. This time that is not happening because earnings will begin to bottom out now.
Have the effects of demonetisation vanished?
The effects of demonetisation are not lingering anymore, except for in the informal economy.
More financialisation is happening and more money is coming into banks. We should be done with demonetisation in Q3 and Q4 for the informal sector.
Stockwise, we saw impact for six-nine months. A permanent shift to the formal economy and more non-cash transactions are good for interest rates in the long term, as it will improve the tax-to-GDP ratio and, in turn, fiscal deficit.
Will equities continue to do well versus other asset classes?
People have been under-invested in equities. So, even a minimal 10 per cent return (an example) in equity will still be better than fixed income return.
Unless interest rates are going to increase very sustainably equity will continue to attract flows. Equity will do better than fixed income in next two years though not as great as in the past.
How will India perform compared to other emerging markets?
India offers a lot of diversity in terms of variety of sectors and stocks to foreign investors. Unlike other countries in emerging markets where you find companies mostly in sectors like real estate, technology and financials, one also gets to invest in stocks of companies in domestic consumer, auto, cement and so on.
What are your favourite sectors?
Our portfolio is skewed towards domestic cyclicals like automobiles, cement, and financials (mostly private banks).
We are under weight on IT, pharma and FMCG.
Do you see the rally in metal stocks continuing?
The consensus view is that US will hike rates by 50-75 basis points in 2018. However, rate hikes are accompanied by improving growth of large economies (US, Europe,Japan).
This will be supportive to commodities rally and metals stocks.