The overall expectation for market return can be moderated compared to the euphoria in equities seen over the last three years, but investors can add quality stocks that are available at a discount, Vinod Nair, Head of Research at Geojit Financial Services, said in an exclusive interview with Moneycontrol’s Kshitij Anand. Edited excerpts …
Moody’s has upgraded India’s sovereign rating to Baa2, with a stable outlook. What was your first reaction and will it help in attracting more capital from foreign investors?
It seems that international rating agencies were waiting to see the implementation of new reforms, recapitalisation of PSU Banks and restructuring of NPAs in the Indian banking sector.
As the implementation of transformative decisions are progressive and government’s spending & deficit plans are encouraging, Moody’s decided to take the overdue decision on India’s rating.
We understand that FIIs were net sellers in the secondary market until the time of the announcement of re-cap and Bharatmala by the government of India.
FIIs have turned as net buyers with inflows of Rs 22,500 crore since 25th October. We feel that this trend is likely to continue and India will outperform in the long-term.
October belonged to the bulls with 6 percent gains on the benchmark index. Do you see the rally taking a halt in December as we approach key events such as US Fed policy review, state elections, as well as the upcoming holiday season?
A halt in the rally was triggered by an increase in 10-year yield and crude oil prices. The 10-year benchmark government bond yield increased to 7.05 percent, which is 70 bps up from the low of June 2017.
The trend had become more volatile since the RBI bi-monthly monetary policy during Aug-Oct, when it turned more hawkish. CPI has been continuously increasing over the last 6months. October CPI stands at 3.58 percent while core inflation is up to 4.6 percent, which is at the upper end of the 4.2 percent – 4.6 percent range forecast by RBI.
Crude oil prices are at 2-year high and have doubled from the low in the last 1 year. This trend will develop as per the progress in the Middle East which is very difficult to extrapolate now. The US Fed rate is likely to increase in December and 2-3 times more in 2018.
As a result, the rupee has started to depreciate in the culmination of fear from an increase in fiscal deficit and higher supply of government bonds due to oil prices, higher govt spending and cut in GST rate.
We were bound to see some consolidation due to high valuation and this ongoing volatility will work good for the market as earnings growth is likely to reverse soon.
What is your call on the recent tax rate cut by GST Council? Do you think it will help release some pressure off from the trading community and boost demand especially on those good which now attract less tax?
This will certainly be a big beneficiary to the trading and consumers as volumes increases, margin expands while cost reduces.
In terms of companies, a significant benefit is seen in FMCG, Consumer discretionary, building materials and restaurants. The GST council reduced items under 28 percent slab to 50 items from 178 items earlier, 13 items have been reduced to 12 percent from 18 percent, while 2 items have been reduced to 12 percent from 28 percent.
As many as 6 items have been brought into 5 percent from 18 percent, 8 items have been cut to 5 percent from 18 percent and 6 items have been lowered to 0 percent from 5 percent.
Further, there is an expectation that some more items under the highest slab of 28 percent is likely to come down in near future.
Do you think Nifty could make an attempt to scale Mount 11K before the close out of this year?
Well, such short-term outlook will be very difficult to pen. But, what we can express is that it is a good time to chip into the market slowly and consider to add good quality stocks that are available about 10 percent to 20 percent lower than a month ago.
This consolidation may continue for some more time depending on the developments of the triggers mentioned earlier. The overall expectation for market return can be moderated compared to the euphoria to equity investment seen over the last 3 years.
Three main reasons for a moderate return on equity are a reduction in global liquidity, increase in bond yield and premium valuation.
What should be the ideal portfolio strategy for investors considering the fact we are trading at record highs and the average age of the investor is 30-40 years? How much should one park in direct equities, mutual funds, debt instruments, or precious metals?
Though the overall return on equity is likely to moderate, global and domestic economy are likely to improve. Domestic liquidity is maintained solid and that will provide enough legroom for good stocks ideas and return.
We can expect well maintained listed entities (shift in business from unorganised to organised), upcoming sectors due to increase in domestic and global demand (Defence, Chemical, Textile, Metals, Exports) and value buying (Pharmaceuticals, IT, Telecom) will maintain the attractiveness of the equity market. We can expect direct equity to reduce during the long-term while MF proportion in equity and debt will likely increase.
Where do you see crude oil heading? And, will prices above USD 65-70/bbl be a problem for Indian economy and markets?
The recovery of oil prices from USD 50/bbl to USD 60/bbl was largely due to a production cut by OPEC and non-OPEC countries, and this was further boosted by the expectation of a further cut in production.
The recent spurt in prices was largely due to geopolitical tensions in the Middle East. But IEA has lowered its demand forecast due to higher inventory, slower pick-up in demand and higher US shale exports.
In the current to medium term, we expect the oil prices to trade in a range of USD 55-65/bbl as long as geopolitical tensions are not blown out proportion.
Considering this, we think that the domestic economy and market is less likely to have any further significant impact unless geopolitical risks increase.
What is your call on a sector which has done extremely well in 2017 such as realty, metals, etc?
It seems that the worst is over for the metals sector given an improvement in the outlook for the global economy and strong pick-up in commodity prices. Historically, there is a great influence of Chinese factor in the global metal prices, which is recently at a slow pace.
However, given supply-side constraints due to the closure of certain mines, tighter environmental constraints, a slow ramp-up in new capacity, strong global demand and policy action to limit exports, the metals sector will continue to be attractive in the medium term.
We don’t have an active coverage on the realty sector. However, anecdotal evidence suggests that demonetisation and RERA have impacted the sector. The pain may continue for some more time due to high unsold inventory levels in metros and lacklustre demand.
Markets are trading near record highs. What would be your advice to investors looking to put money directly in equities or invest in markets via mutual funds?
Hold high-quality stocks and use this consolidation as an opportunity to bargain for a better price on these stocks, since the long-term outlook is solid.
Increase the mix in your portfolio to sectors like defence, chemicals, public sector banks, metals, exports, IT, pharmaceuticals and telecom for long-term benefits. On an overall basis, return from equity may moderate during the short to medium term.