The sharp stock rally in recent months has come as a surprise to many, but the market now awaits an event, like improved corporate earnings, for the next big move. Though the corporate earnings growth will be positive, the real momentum in earnings will be seen in the third or fourth quarter of FY18. In the meantime the market can go through a little bit of volatility, said
Ravi Gopalkrishan, head equity, Canara Robeco Mutual Fund, in an interview with Ashwin J Punnen. Excerpts:
The market has rallied quite sharply. What’s your view?
Generally, the market discounts a lot of things in a hurry. While it has moved up, in the longer term the potential for the market to go up is high. Since the market has run up, it may for the time being wait for events like quarterly results, GST implementation, the US interest hike to pan out. These events will determine the market direction in the short-term.
There have been huge inflows from foreign funds. Will that kind of liquidity flow continue?
It’s difficult to predict. Yes, there has been good fund flows from overseas investors since February and is continuing even now. It can largely be attributed to India’s performance compared with the rest of the world in terms of growth in the macro level and reforms by the government. For the next two year, there will be firm decision-making from the government. If reforms stay on track then slowly and steadily the market will gather momentum.
Only big variable here is the earnings growth. What is happening here is that the market has run up, but earnings growth is still elusive. There are pockets that are showing strengths.
Will we get to see a turnaround in corporate earnings this quarter?
Not necessarily, because part of the negative impact of demonetisation will be seen in the numbers of some companies in specific sectors. I don’t think the results will be better, that dramatically. It will be good, but not spectacular. But I don’t see any major negative surprises from any particular sector.
If the goods and services tax (GST) comes on July 1, in the next quarter there will be inventory re-stocking and other adjustment. So there will be some disruptions in numbers. I think the trend will be positive for the next few quarters. The real momentum pickup in corporate earnings will be seen in the third or fourth quarter of FY18. In the meantime, the market can go through a bit of volatility. Directionally, we see improvement on the long-term basis. If the question is whether the direction is straight or not, then the answer is no. There will be volatile periods and each of these volatile periods will be used for increasing the equity allocation.
How has been inflow in mutual funds in recent months?
The domestic funds have received positive inflows. Unlike in the earlier times, during every recent dip in the market, investors put in more money into equity funds. This is an encouraging sign. Earlier a lot of money used to come in the top, and used to flow out when the market fell. This again shows that investors have become mature. Flows from SIPs are also strong – it’s a positive story.
Which sectors are you positive on?
We have been positive on banks – both public and private. Talking about banking sector, there is still problem with stressed assets. But the recognisation that there is a problem is a positive. In the past two years, lot of banks recognised that there is a problem. The intensity of that recognisation is declining because more or less everything is known now. So, incrementally there may not be any major negative surprises. That way you can selectively look at banking stocks. We have been adding banks into our portfolio with all declines. Again stressed sectors like steel are looking up. The global steel prices are going up and that’s positive for these companies. The steel companies have started doing slightly better.
Similarly other sectors like power is also improving. In infrastructure, we expect lot of action from the government that will help improve the situation. In the sectors like road, power transmission, defence and railways we are expecting lot of traction going forward.
The other sector is consumer discretionary like auto and auto ancillaries, as we believe the consumption story in India is very strong.
With the wealth effect trickling down to the rural economy, consumption stocks will do well.
Sectors like cement and building materials will do well provided the low-cost housing gets some push from the government. We are positive on oil marketing companies, as there is lot of flexibility in terms of pricing today. They will be able to maintain their margins.
What about private capex, when do you see a turnaround?
The private capex happen when capacity utilisation goes up. Now the capacity utilisation is not at the optimal level. Once the utilisation goes up to 80-85 per cent, private companies will also start investing. However, I guess it’s 12-18 months away.
What return expectations can investors have for next 2-3 years?
I look at returns on equity as direct fallout of earnings growth. This year we will see a 12-13 per cent growth in earnings, next year 15-18 per cent and after that above 20 per cent. In that case, you can expect 15-18 per cent CAGR returns from equity.
What level do you see for the Sensex?
What I am saying, you extrapolate earnings growth to index growth as the market usually track earnings. If your confidence on earnings growth is high then there is a possibility of index growing to a higher trajectory. If growth expectations are low then you will have to moderate your return expectations. But, I feel, equity, as an asset class will do well in the next 2-3 years.
What are the big risks?
The risks can come from both domestic as well as global factors. At the domestic level, I am watching inflation numbers and interest rate scenario as I feel interest rate in India needs go down. If there is a delay in that, the capex may not come early. The other risk is that if the corporate profits are not on the expected lines the market may get disappointed as it has gone up in the anticipation of good second half numbers. If earnings disappoints then it’s negative for the market.
On the global front, it’s very volatile. Every country, including China, is looking inward as opposed to a decade ago when everyone was looking outside. So, you may not get that global tailwind for a classic bull market where India will have to pull by itself. Thus, investors should look at SIP and STP for investing in the market in this condition.