Strong domestic, foreign fund inflow into market likely
Feb 12 2017
Is the equity market more news sensitive than underlying fundamentals?
For a long-term investor, nothing is more important than underlying valuations/ fundamentals and characteristics of a business. Sensitivity to news might help a short-term trader make a quick buck here and there. But it’s not a sustainable way to make money. Equities are a long-term product and should be seen from a minimum of 5-year duration. As such, only fundamentals of the company will matter in the long-run.
Today due to social media and the internet there has been an overload of information, which makes us want to take action for any and every stimuli. With a click of a button, one can buy and sell shares. This is where people lose maximum money due to lack of patience and want for action all the time.
The new year for the market started on a cautious note as big events like inauguration of the new US president and GST roll-out lined up. How they are going to impact the market.
In the short-term, my guess is as good as anyone else’s. But the market is neither very cheap, nor in a bubble like state. This is a transitionary year after demonetisation. We need to wait and watch how things actually play out – the goods and services tax (GST) as well as the Donald Trump’s presidency?
The budget was positive from a market perspective, as the long-term capital gain was not tinkered with. It’s going to be a stock-pickers’ market and one will have to be stock-specific in selection. Business fundamentals and valuations will play a major role in which companies do well. I don’t think we will see a broad-based market rally in the short-run. The need of the hour is to tread cautiously and be wise with stock selection.
How have been the Q3 earnings of the top companies, so far?
The third quarter earnings have been reasonable considering the reforms undertaken.
What’s your assessment about impact of demonetisation on earnings in Q3 and Q4 of FY17.
The real impact is too soon to tell. Many businesses have been quite clear in communicating the impact on their respective industries via quarterly conference calls. There will be some disproportionate impact on some industries compared with others. The main data points to focus on are – how the digital payments infrastructure and the cash ecosystem develop going ahead. People’s need don’t change, just the forms in which they will make payments may change.
Do you see GST rollout, probably by July, as another disruption for companies and earnings?
Reforms may seem disruptive but sometimes they’re necessary. It’s too difficult to predict the impact of any reform to the last decimal place, on multiple industries. Most of the GST discussion highlights supply chain efficiencies. That should always be welcomed because it will help businesses save money in the long run and also reducing environmental impact as economic activity grows. Such reforms also allow new type of businesses to flourish who can aggregate capacities more efficiently. So, any short-term disruption is perhaps like a speed bump rather than a sinkhole. It can be traversed.
With US policies to be reframed under Trump, will IT and pharma stocks are avoided by investors in the near-term?
It’s hard to predict the full gamut of policies that can come about from the US, let alone from our own government. IT and pharma sectors have their own issues to deal with. The new policies will either help them accelerate change or they may have to fundamentally rework their business model. In the IT sector, for instance, a lot of managed services work is shrinking, whereas digital technology-related work is gaining revenue share. Companies that need to realign themselves from that point of view will need to do it regardless of policy decisions. It’s a structural change. The policy changes will at best give a guideline to the industry to think about how they will invest in the future. IT has been a highly adaptable sector, historically.
For the pharma sector, the problem is two-fold – increasing competition in complex generic drugs and quality issues across their export manufacturing locations. They will need to be separately addressed anyway, apart from any policy changes.
Which sectors look promising from the investment point of view in the backdrop of the budget announcements?
For us, one year’s budget is too short a timeframe to think about investments. If we intend to practice long-term investing, the outlook has to be at least about 5 years. That means the data points that we focus on don’t just incorporate current events like the budget or policy changes, but we also focus on changes in the long-term trends in specific businesses. The budget will boost some areas of business activity and that’s always a welcome sign since it helps the economy grow. That doesn’t mean each of the budget items will immediately provide some actionable ideas. The market also anticipates changes and values businesses accordingly. If we find some ideas due to the budget announcement with the parameters that we look for, while investing, we will be more than happy to pursue them.
While the foreign portfolio investors (FPI) have been net sellers in January, retail investors are investing through mutual funds. Do you see a risk to the market performance if FPIs remain negative in the light of the US Fed raising rates further?
I don’t think one can ignore India for a long time. The long-term prospects of our economy look extremely attractive. So, while foreign flows might be muted for a short time, I do see them coming back. In the meantime retail participation has been really good, which has compensated for foreign outflows. The next 3-5 years look extremely good for the country and I see strong domestic as well as foreign funds coming into the market.
Do you see higher retail participation in the equity market through mutual funds this year, as the market is expected to be volatile?
Yes. We see higher retail participation this year as well as subsequent years. The Indian investor is getting matured and sees volatility as its friend. People are waiting to buy on dips and it was evident in the days after demonetisation, Brexit and Trump’s election. Additionally, no other asset class seems as attractive, and has done so well as the equity market. We have just scratched the surface in terms of retail participation through mutual funds. There is a long way to go.