Imports of parts from China would certainly be affected for a while due to the Coronavirus outbreak. But, at the same time, there is an opportunity for Indian companies to fill in the gap left by Chinese manufacturers.
Imports of parts from China would certainly be affected for a while due to coronavirus, but at the same time, there is an opportunity for Indian companies to fill in the gap left behind by their Chinese counterparts, EA Sundaram, Executive Director & CIO- Equities- o3 Capital, said in an interview with Moneycontrol’s Kshitij Anand.
Q) Markets seem to be inching higher at a time when inflation is on the rise, IIP suggests contraction and earnings have been Ok. On the global front, coronavirus is making investors nervous. What is fueling the upside in markets?
A) The primary reason for this dichotomy is the availability of increased liquidity. Inflows into equity, both in the domestic market and through FPI/FII, have been robust in the past year.
As can be seen from the table, equity assets of mutual funds grew 14.2 percent through equity-oriented schemes, and by 57.4 percent through ETFs and FOFs during the calendar year 2019. The market (Nifty500) grew only 8.2 percent during this period. So there has been a substantial net inflow into equity funds.
The FPI/FII inflows have also been robust.
The lower interest rates prevalent in the major markets of the world have certainly been a factor in this. US interest rates (Fed funds rate) have fallen from 2.5 percent to 1.75 percent in the past year. The European interest rate is presently at 0 percent. Bank of Japan rate is at 0.1 percent.
Earlier, the FII inflows used to determine the market’s movement. Nowadays, the robust inflows from SIPs in India, and the flow from the EPFO inflows have given a balance to the influences, and this is a healthy development. Inflows from SIPs are now more than Rs.8500 crores per month. These factors cumulatively have contributed to the rise in the stock market.Q) Do you think the Budget had enough firepower to push the economy back towards 6 percent in FY21?
A) Budget is one of the various fiscal events that shape the course of the economy. However, it is not the only one. For example, the changes to the GST rates does not take place through the Budget.
The sharp reduction in corporate income tax rates (that were announced in September 2019) was not a part of any Budget. That said, the recent Budget, like all others, had some positive and disappointing features.
The focus on infrastructure, including farm infrastructure, is positive. Other positives are announcements regarding the cold supply chain, Kisan rail, and specific mention of support to aquaculture and fisheries.
The Ministry of Road Transport and Highways has received an allocation of Rs 91,823 crore in this Budget, the biggest amongst all infrastructure sectors.
The Railway Ministry has received budgetary support of Rs 72,216 crore, out of which electrification would receive the maximum priority. The total budgetary support for the infrastructure project is Rs 4,32,424 crore.
While these are all positives, we would have been happier with policies regarding more flexibility towards labour laws, a rationalisation of the small-savings rate and linking them to inflation.
We think that a single Budget document is seldom the game-changer. It is the series of reform measures that the government undertakes that matter.Q) Coronavirus concerns are mounting and if the situation escalates further do you think it will have a long-lasting impact on the Indian economy and impact earnings of India Inc?
A) This is indeed a serious concern. The immediate priority is to take all possible steps to contain the spread of this virus.
The good news is that the recovery rates are showing signs of improvement worldwide, and the encouraging news that the coronavirus does not survive under conditions of higher temperatures. As the winter is drawing to a close, this may provide relief.
Imports of parts from China would certainly be affected for a while. At the same time, there is an opportunity for Indian companies to fill in the gap left by Chinese manufacturers.Q) What is your take on December quarter earnings? Do you see any green shoots?
A) The results for the FMCG companies and some finance companies have been good, but they can’t be described as green shoots. Green shoots happen after a prolonged dry spell! That way, we have seen some green shoots in stronger public sector banks. We still haven’t seen any green shoots in the results of industrial companies.
According to media reports, the cumulative PAT growth of around 2,250 companies that have declared the December quarter results has been around 36 percent compared to the same period last year. Of course, the low base effect, and the corporate tax cut recently introduced would have contributed to this.Q) What is your take on LIC going public? It would no doubt become the most valued company in terms of market cap but will the government make this happen in the next 12 months or so? What are some of the challenges and opportunities?
A) It looks like that the LIC IPO will happen within the next 12 months, and certainly, it would bring in a mega market-cap company into the listed space. We await more details of LIC’s financials and balance sheet before commenting further.
This is a sector that has seen increased investor interest of late. Many companies in the same space have seen considerable investor interest in the last few months. A significantly underpenetrated life insurance market makes it a long-term growth story.
The recent move of the Budget to remove the tax breaks for LIC policies is an interesting test case about how the story pans out. It would be interesting to see how LIC performs in the stock market.Q) Mutual fund investors confident despite weak macros and volatile equity markets which is a positive sign. Investors have pumped Rs 1.2 lakh crore into various mutual fund schemes in January. But, this time small & midcap schemes also attracted a large sum of money. Do you think the lull in small & midcaps is over?
A) The Nifty Midcap index has now valuation of around 24-25 PE, which is around its long-term average valuation. It touched a heady 110 times PE in 2017.
When the valuation of a sector goes so far above its long-term average, there is bound to be a sharp correction. That said, we have to be aware that there is nothing superior to midcaps compared to large-caps.
The largecap index, midcap index, and the smallcap index have very similar long-term track records. It is just that they move up and down in different trajectories.
What is encouraging is that the monthly Systematic Investment Plan (SIP) inflow figures have been encouraging.
AMFI has reported that the number of new SIPs registered every month is now more than 12 lakh.
The investors have been through a cycle in the midcap stocks, and it is heartening to see many of the SIPs continuing. This is a good sign. The distribution community in India needs to be commended for this.Q) Valentine’s Day just went by – when did your love with capital markets begin?
A) I certainly am not one of those whose first words uttered were “capital gains”, or “dividend yield”. Most of my learning has been on the job. Over the last nearly 3 decades, I have been fortunate enough to have interacted with and worked with several experts from whom I have learned a great deal.
The truth about the stock market (and one that very few people realise) is that it does not need a stratospheric intelligence to succeed in this business. All it needs is the temperament to stay away from unnecessary risks. This method is a surer way to succeed.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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