The market will continue to remain range-bound at the start of 2017, says Harish Krishnan, Fund Manager at Kotak Mutual Fund. He says the Budget will be the key event of the year and waits to see how the government drives demand in the economy through it.
On a long-term horizon, Krishnan says he is bullish on the auto, cement, oil and gas segments. He is especially positive on oil and gas as these sectors remain to be untouched by the demonetisation.
He says earnings recovery remains to be a cause for concern. The recovery may take more than a few months.
Below is the verbatim transcript of Harish Krishnan’s interview to Surabhi Upadhyay & Sonia Shenoy on CNBC-TV18.
Surabhi: What is the call I mean we have been very range bound last couple of weeks, enough said about the headwinds demonetisation, taxation, Budget etc how are you looking forward to 2017?
A: I guess you summed it up, it has been a range bound market and we believe the start of the next year also to be equally range bound. You mentioned a lot of local factors but I think equally one need to keep an eye on lot of global developments. Lot of asset classes have rallied and expectation of Donald Trump getting back into power and announcing huge fiscal spending, so that needs to be kept in watch.
All in all what we think is that there are few sectors which have got hit on account of demonetisation. At this point of time the Budget, every year we make a lot of song and dance about it, but this year really it looks to be the key event for the year. Because they are pretty much the only team having any kind of power to drive revenue or to drive demand at this point of time.
Sonia: It is a great day to get you in because the way the market is surging today but what have you made of the move? Do you think that the worst of demonetisation and the tax fears are now behind us or do you think that there could still be some more volatility because of these issues as we head into the Budget?
A: I think today’s move possibly could also be led by month end activity, you got the auctions expiry as well. So, I don’t think one should make a too much of off it just from a one day move. Clearly, there are lot of fears on the taxation front as well as on the earnings front. So, I don’t think we are totally out of the woods yet, but clearly from allocation point of view, yes, it does make sense to get into equities to allocate into equities as an asset class given the medium to longer-term positive view on the same.
Surabhi: I want to talk to you about one space which is very active today, which is cigarettes and of course ITC is a big holding in your fund as well. What is the anticipation ahead of the budget and overall are you expecting the space to deliver returns this year?
A: I think the finance minister has told that on the indirect taxation because of the pending GST there cannot be too much of tinkering around – that to us could seem to imply that from the Budget perspective it shouldn’t be a totally adverse Budget as far as cigarette consumption is concerned, but these events are always binary in nature. I think valuations are reasonable compare to whole bunch of other consumer companies and which is why ITC remains one of our key holdings across our funds.
Sonia: And you also have exposure to a lot of autos stocks like Maruti, Hero Motocorp etc. Wanted your thoughts on the consumption space especially autos, do you think that most of the damage is already in the price or do you expect even the months of January and February to see some impact of demonetisation?
A: I think from our interactions with various auto companies it is quite clear that it is not going to be a V-shaped recovery that you see such a huge fall and then things come back to normal in a month or two month time. It is going to take some time to get back to normalcy there is no doubt about that, but typically markets look out for anywhere between 3-6 months ahead of things becoming normal. So our entire thesis is predicated on the fact that these products that you mentioned aren’t really at the top of the pyramid in each of the consumer categories, where we think luxury and consumption could be impacted far more.
These appeal more to the middle class India and clearly hopefully the Budget talking about some kind of tax sops to this segment that should be fervour back into this kind of demands for this kind of companies.