Brexit & Fed policy may roil mkts; it's calm before storm: Pros

Khemani: It looks like that I don’t think that kind of same global environment probably will revisit again in this year because there is a lot more coordination among the central bankers and one can’t predict global macros very precisely, but looks like that it will not be the case. However, whenever unpredicted event takes place, at that time the reactions are kneejerk, but these both events, in some sense predicted, there is sensitivity, markets are expecting possibility, so those kinds of things then don’t happen. I would say it will be probably a marginal kind of impact.

Ekta: I can’t resist this question Punjab National Bank (PNB) went up and it was up 2 percent post the largest loss that they have recorded on a quarterly basis. Do you think that the market is factoring in, maybe the worst is over for public sector undertaking (PSU) banks and now Q1 FY17 onwards it could be better and would you be buyer in the PSU banks?

Khemani: There is a saying that when the stock stops reacting negative to the negative news negatively it is good and vice a versa. However, the larger point in this current exercise, if you see, most of the PSU banks, the broader theme seems to be in place that onetime cleanup; let get the worst out and get the banks sort of back on track. So, this seems to be part of a coordinated plan according to me by government, by the Reserve Bank of India (RBI) by the managements of the banks.

This obviously cleans up and then banks can go back on a kind of trajectory. Obviously, it will take some time for them to resolve the kind of asset quality which is there, sitting on the banks, but I do believe that it puts lots of uncertainty behind and that will give a lot of comfort to investors. Otherwise investors anyways were factoring in their own estimates about the asset quality. So, might as well give whatever is there and get done with it. It seems this will trigger for some sort of consolidation within the PSU banks, this will create a trigger for broader game plan going forward.

So, I think in my opinion this is all part of a well coordinated strategy and it is in good for long-term perspective. Now you can get banking sector, which is very critical for the overall economic growth and as Governor Rajan has been saying you can’t create a growth in an unstable kind of environment. So, you have to get stability.

Shah: If you go back to the US, when they did the stress test of their banks they actually drew the line in the sand and growth came back after that and all the uncertainties around banks ended. I think the asset quality review (AQR) process of RBI was India version of the stress test. We did it in our own way but I think it started this repair job that is under way right now.

Latha: The reason for inviting you was to assess the two years that went by. However, what I am getting from you is a very positive report card. One that a significant amount of decent path breaking legislation has been passed in the past two years and GST is almost here that the foreign institution investor (FII) sentiment for the past two years has been extremely positive on India and that earnings wise as well as market dynamics wise it doesn’t look like we are going to revisit 6,800 so, just give us a grading A, B, C for two years?

Shah: I would say A.

Khemani: Clear A.

Jain: Resounding A.

Ekta: Wanted to talk to you about what is happening in the global commodity and the currency space because we have seen emerging markets such as Russia recover this year, stability has come in oil prices, there is stability come in other commodities as well but the rupee is now at a two month low. Is that something which might deter foreign investors that maybe we are a little uncertain about where Brent crude is headed, where the rupee is headed?

Jain: It is very interesting that last year if you saw the Russian markets, the Brazilian markets, in fact essentially all the commodity producers were down anywhere between 50 and 80 percent, if you adjust for the currency, sometimes even higher. Whenever something comes down so sharply, people are obviously expecting the worst and when the worst does not pan out you can expect a natural bounce. So, if you see, this year, for the year, I think from that base most of these markets, again adjusted for the currency would be up 30-40 percent. So, in the short-term you can say those markets have done well, but anybody who has looked at one-and-half to three year chart, they would tell you that things are still in pretty bad shape. I don’t think it was unexpected because the markets were down so much. It has made incremental, especially the more speculative money move into those asset classes. As I was saying earlier, there are pockets of money, there are exchange-traded funds (ETFs), there is hedge fund money and there is long-term money. This long-term money, I don’t think is going to take decisions based on that but this hedge fund money and maybe some part of the ETF money, there might be some tactical change in allocations.

Latha: I do want to talk sectors, would you say this is a recovering economy? Are you going to metals, are you going to public sector banks or at least the big lenders, maybe the ICICI Banks and the Axis Banks, if not PSUs? Will you start betting on a recovering economy?

Shah: I would strongly feel that India is coming back and I think all things government has done and hopefully we have good monsoons, things will come back. However, I think idea is to focus on the non-tradeable rather than the tradeable sector because the global overcapacity like steel and metal and all, will still continue to act as a overhang for the tradeable sector because tradeable sector will be driven by global sentiment and I think global sentiment is still fairly bad, global overcapacity is very high.

So, anybody who wants to really bet on the Indian recovery should focus more on what we call the non-tradeable which will be services, media, maybe engineering, procurement and construction (EPC) and those contracts. I think things like defence will come back because defence will be an India industry. So, I would really bet on that, I think EPC is coming back as the road projects and a lot of construction is back._PAGEBREAK_

Latha: There are not too many healthy balance sheets?

Shah: There are not too many of them but the ones which are healthy or the ones which are getting repaired are seeing a huge amount of work coming there. I think the same thing in financial services, there is a huge amount of growth. Housing is coming back very strongly and with the Real Estate Bill and all, on the medium-term basis the impact on housing as a sector; both housing - the actual buying of housing and the housing finance part of the opportunity is going to be very strong.

Latha: Usually the rule of thumb is that real estate prices should really break down at one point in time for the sector to bounce back, we didn’t see such a breakdown of prices; we saw stagnation. In spite of it you think that real estate sector is now bottomed out?

Shah: Yes because actually it did not create a bubble also. So, if you see and thanks to RBI's actions and all that, they really applied the brakes very early on and with this global liquidity that is there, a real estate sector breaking down and completely collapsing is actually very unlikely. However, if you look at, house prices have been stagnant for the last about five years and with whatever inflation we have, 5-8 percent, in real terms it has got cheaper and with all the efforts, with the Real Estate Bill and everything else, a cleanup of the sector, the elimination of black money, all of that, I think housing will get more and more affordable and if interest rates also come down then from a housing finance point of view it becomes even more affordable. I think all these are the kind of opportunities investors can strongly look at.

Ekta: I wanted your thoughts on these focused concept stories which are now coming up from the initial public offering (IPO) market especially Thyrocare Technologies, best subscription ever since 2007-2008. The others like Dr Lal PathLab, Ujjivan Financial Services of the world, Parag Milk Foods, good response today. Are you a subscriber to any of these concept stories? Would you chose one of them would you recommend one of them?

Khemani: In last 12 to 18 months as the Indian economy is expanding and consumption is increasing, the newer kinds of stories are coming towards the markets which were not there. So, earlier if you look at the healthcare, there were hardly one or two plays while there is a large market but there were one or two plays. Now we have three-four plays already there. Likewise, I think we did not have aviation in play; we didn’t have dairy companies in play. However, these are high growth sectors. So through IPO process lots of these interesting large companies have come and are now hitting the market and they are now available for investment by the investors.

Undoubtedly, you can’t broad-brush and say all IPOs are good to invest and all, but some of these interesting names in new segment, emerging sector which has huge long growth lever left over next 10-20 years, they will become fairly large companies. Healthcare, we have just started, we have scratched the surface, dairy we have scratched the surface, insurance – it is like just a sector we don’t have any play which is a pure play listed company. So, it is a huge play going forward.

You will see this year, three-four large big companies will be hitting the market and this will be great opportunity to participate in the significant wealth creation over next 10-20 years. I see IPOs as a great opportunity for participating in the wealth creation which is part of Indian economy. Just see all the banks which hit the market 10-15 years ago, they have created significant wealth for investor. So, I feel that we are in that phase where all the big sectors which will be in next 8-10 years down the line, you are seeing some of the great ideas, stories hitting the market now.

Latha: Your last sentence was if interest rates also fall that will be the icing on the cake. How much RBI would cut you think but more importantly how much will money get cheaper for a small and medium enterprise (SME) or for a borrower? Will that be more for the borrower?

Shah: The important question is not just the cost of funds but the availability of funds. Cost of funds getting cheaper will make it easier by getting the economy a lot more kick started, lubricated and that makes it much more impact full for SMEs. SMEs depend on economic activity a lot more and the velocity of the money rather than just the cost of money. Interest rate - psychologically will be a big impact and the two big investments sectors in India, housing and infrastructure they both happen to be a lot more interest rates sensitive.

If you are going to put up an infrastructure project and if your cost of funds is 11 versus 13, makes a huge difference because these are 30 years projects and a small change in interest rate can affect the viability of that project and the same thing in housing. I think everybody buying a house with a 30 year view, so housing and infrastructure are truly long-term investments and there interest rate sensitivity is a lot higher. So, even a 40-50 basis point cut will have a huge impact because it will kick start a lot of activity which will have spinoff benefits for SMEs and everybody else.

Latha: Net-net how you are expecting foreign institutional investor (FII) behaviour, you said that sentiment has been unalloyed and good, but there have been large swathes of FIIs not buying and even selling out. Now with probably the GST in and let us assume the GST is in because the numbers seem to be favouring the government at this point in time. Will that be path breaking, should we see a rush of funds?

Jain: When you start looking at this numbers, the first thing that one should do is probably say FII plus FDI, so don’t look the FII numbers in isolation and I continue to repeat because there are very different investor types who are coming through one route versus the other route, as a sum total of this I do think you would expect a very steady stream of money coming to India and there will be an acceleration this year, because the number of people that I am meeting now who are actually looking to make their first aware investment in India is remarkable. Most of these people have no exposure that coming to India for the first time, talking to us, understanding the stories and they do take two-four years before they start to make commitments to a country. We have reached a stage not only us, but there few of us where we looking for partners to come in, in different forms and formats to allocate capital to India and I do think that will actually go up significantly and all the stuff that Vikas has been talking about, there are so many sectors which are doing extremely well. It just gets hidden because 65 percent of Nifty which is a headline index for markets is actually linked to global trade and financing of that global trade. So if you take that out, the 35 percent of the index is doing very well, the money that is coming in is also very specific or is linked to specific opportunities now. Money is not coming in to largecap funds or to Nifty or stuff like that, but people are saying there are credit opportunities why don’t we make a big play in the credit opportunity. There is a play in the distressed opportunity why don’t we come into distress opportunity. There is an opportunity in infrastructure why don’t we form a JV with somebody and invest in that opportunity, so money is coming in that route, not really necessarily through the index route.

Latha: What is the high for index in 2016 or one year now if you want a 12 month guess?

Khemani: It should be at least 15 percent up from here.

Latha: If you want Rs 10 crore to spend in a month which shares?

Shah: As I said, financial services.

Latha: Financial services is 35 percent of the economy, at least give us in that, will it be small private banks, non banking financial companies (NBFCs)?

Shah: I would look at the private banks; I would look at housing finance companies for sure and if there are plays available in asset management and wealth management because even that is becoming a rapid growth area in the financial services.

Latha: Will you buy your own shares as what you are saying?

Shah: That we always happy to do, but outside of that I do think that the financial services itself is at a very big inflection point and a little bit of interest rate cut, the economy coming back there will be a rapid growth available to us. I think because of two things, global banking is going back home, so we are seeing the shrinkage of global banks in India and global capital is becoming a global word. Nitin is saying a lot of the large pension funds and all want to come here and finance also needs capital. We have the opportunity, the capital is coming and some part of the competition like global banks are going away, so there is a very big opportunity that is getting created. Outside of that I would invest in the new consumable, the aviations.

Latha: Interglobe Aviation has entered your model portfolio?

Shah: Yes, because we think aviation is a big one and when insurance IPOs come, I do think insurance will become a big another wealth creator when all this HDFC and ICICI insurance companies come to the market. I think what happen to private banks 20 years ago could be the starting point of the private insurance companies now.

Ekta: FIIs net positive by the end of the year?

Jain: Definitely.

Ekta: And domestic institutional investors (DIIs)

Jain: DIIs again would be positive and there is a big theme that’s happening in DIIs, I am sure you would know that there are now 1 crore systematic investment plan (SIPs) growing at around 15-20 percent every year, 1 crore SIPs on an average of Rs 2,700, so you are talking of Rs 2,700 crore of capital coming in every year in equity market.