Rupee unlikely to breach 70/$ in 2017; bet on GST related sectors: Lalit Nambiar

Making short term predictions on the stock market is a bit of mug's game, especially if you consider the market's success rate in predictions on issues such as Brexit, the US Presidency, and demonetisation. Earnings growth continues to elude us.

Domestic liquidity flows into the equity market seemed to have bolstered valuations given that all other asset classes including reality, gold, fixed deposits all look relative unattractively placed.

Valuation may have to that extent discounted some of the consumption revival expectations even while investment revival seems to have got delayed. While the government is doing more than its fair share to shore up investment demand and FDI is strong, private sector capex is yet to pick up.

But, that should get resolved as the twin balance sheet tribulations of Banks as well as the private sector are beginning to get addressed. All that said India continues to be a relatively better placed on growth and economic fundamentals and an overall attractive story

Q) What is your view on rupee which is Asia’s third-best performing currency? The dollar is most likely to appreciate if US Fed plans to increase rates twice in the 9 months.

A) We do not have an official currency view, but our sense is that the rupee is reasonably well placed on inflation differential, current account deficit, and FDI flow.

There does not seem to be any danger of FII outflow, if anything, we could see some inflows as the DM to EM reversal gathers strength. On the downside, the INR is unlikely to depreciate below 70 to the USD.

Q) GST is finally taking shape and should be implemented by July 2017. What is the impact on earnings you are foreseeing in the next 12-24 months? Any specific sectors to focus on which can ride on the GST theme?

A) As the nitty-gritty of the GST policy are still to be ironed out, even companies are unclear of an immediate impact on tax incidence and inventory levels and on the nature of implementation of ‘anti-profiteering’ measures.

With markets placed even further away from the scene of action, the street earnings forecast are likely to be more wrong than right, as was seen in the wake of Demonetisation. One clear theme in terms of outcome which we have been talking about for a long time is the potential volume growth from market share gains to the formal sector from the informal sector.

We saw a glimpse of what may be on the anvil during the post-demonetisation phase. Thus segments including tyres, homebuilding materials, jewellery, footwear, garments and lead-acid batteries could be beneficiaries.

Q) What are the key risks which India faces in the year 2017 (domestic or local)?

A) 1) The pace at which bank balance sheets will be repaired will decide the investment recovery in the country and to that extent slow recovery is a risk; 2) We are also getting close to general elections of 2019; 3) the government may be tempted to loosen its purse strings which do not augur well for the fisc as well as markets.

4) Protectionist rhetoric is getting stronger globally which is a risk for global growth, and 5) experts expect El Niño to rear its head again and can hurt the late part of the 2017 monsoon.

Q) Global liquidity has already taken benchmark indices to record high? Do you think the roller-coaster ride is about to get over?

A) Markets may very well be at the crossroads on the way forward. The US rate hike pathway is reasonably visible, but one can take the view that hikes are because growth and inflation are returning or that the cost of equity is rising.

The first is an indicator of health returning to the developed market (DM) economies and a sentimental positive while the second implies that the threshold rate of return required should be set higher and valuations should come down.

Depending on newsflow and sentiment market will likely gyrate between these two views. My sense, therefore, is that we will have more of the same – rollercoaster rides, or the now ‘not-so-new’ normal.

Q) Do you think Trump is much bigger fear/risk for Emerging Markets including India than US Fed?

A) India is better placed than most when it comes to potential protectionist measures, thus barring the IT sector and perhaps peripherally the Pharma sector, we have little to fear. Expectations on US Fed action also seem to have been largely baked into relative market valuations.

Q) After remaining net buyers in India equity markets we saw some profit taking by DIIs in March. Do you see redemption pressure continuing for mutual funds?

A) The recent up move in markets has been linear so perhaps there has been some profit-booking. Liquidity tends to have its own cycles and it is difficult to second-guess these moves but unless there is an earnings shock or a global event there is unlikely to be any redemption pressure.

Q) What are your overweights and underweights right now in such a market scenario?

A) We have a broad bouquet of fund strategies on offer within the fund house, given our long market history, depth of experienced talent and diversity of fund management styles.

Within the UTI Midcap Fund, one of the key funds that I manage, the focus is largely ‘bottom-up’. We look to pick stocks with a healthy track record and sensible managements but have hit a transitory weak phase in their earnings.

While the fund is bottom-up, in terms of outcome, this strategy presently lends itself to sector overweights in auto, textile, chemicals & fertiliser, and cement and underweights in pharma, energy, metals and IT.

Q) What is your one advice which you want to share with your readers?

A) In the Indian context, the most important decision is to make a beginning in equity. Participate through MFs as they are much safer than directly buying stocks.

After that, asset allocation is perhaps the next most important decision, apportion keeping in mind liquidity and wealth creation needs and given the difficulty in trying to time markets, use the SIP route.

Q) Most analysts have expressed their concern about rising US bond yields. Do you agree with them?

A) The Fed has indicated gradual increases in the federal fund's rate and our sense is Indian markets are presently well-placed and need not be overly concerned.