Navneet Munot, CIO, SBI Mutual Fund says it's yet early days but India could be an â€˜oasis of hope‘ among emerging markets (EMs) because on a relative basis the macro fundamentals look good along with optimism of domestic investors which has been supporting India market.
Navneet Munot, CIO, SBI Mutual Fund says it's yet early days but India could be an ‘oasis of hope’ among emerging markets (EMs) because on a relative basis the macro fundamentals look good along with optimism of domestic investors which has been supporting the Indian market.
In earlier crisis situations, usually, the domestic investors have followed the foreign institutional investors (FIIs) but not this time, says Munot.
The Indian market on Monday was consolidating in early trade post the Brexit vote.
However, he warns that the Brexit event could have longer-term repercussions that may play out over the next couple of years.
Historically, India decoupling from global events has never happened but this time it could be different maybe on the back of India carrying out the most impressive FDI reforms and opening up. Secondly, most central banks currently have negative interest rates unlike India. So, relatively India seems to be better placed to tackle this event, says Munot in an interview to CNBC-TV18.
He again reiterates that in case there is a risk-off and all EMs see outflows then India cannot be insulated. However, India’s dependence on FIIs has definitely gone down, he adds.
Talking on the impact of the Brexit event on Indian companies that have exposure to the UK, Munot says one needs to wait and watch how the whole process plays out first and also that some of these companies may have already hedged their positions.
Moreover, if one sees price correction in some of the good IT, pharma names then this could make them attractive investment opportunities.
One could look at domestic consumption stories which are likely to perform on back of good monsoons, 7th Pay Commission rollout, government spending etc., says Munot.
According to him, going forward, the market will have to take congnisance of political cues from US and Europe.
Below is the verbatim transcript of Navneet Munot's interview with Anuj Singhal and Ekta Batra on CNBC-TV18.
Anuj: The market has been quite resilient, a week back if you had asked that the market will have to negotiate with both Rexit and Brexit and global market volatility, both could have forgiven for thinking that we could see even 7,700 or 7,800. We are fine at the index level, what you make of the current resilience and you think that’s going to continue?
A: So just two days, we will have to wait and watch first of all, but from the India’s perspective as I am sure everybody would have talked about that this time on a relative basis compare to most of these episodes in history, relatively the macro fundamentals are looking better and also that the flow of the domestic money, so last time when we had the crisis in 2013, the taper tantrum or the Grexit before that or 2008 when you compare with those events, the domestic investors were also on the same side with the foreign investors.
This time we are seeing the domestic flows continuing that will also providing some cushion and also from a macro perspective India is definitely in a far better position this time compare to most of the similar episodes, but as I mention that this is too early, this is a big event with lots of long term repercussions and we will have to wait and watch for how the whole story unfolds over a longer period.
Ekta: Just extending that point about the macros do you think that India is actually going to be a windfall gainer because of what’s going to take place on the likely Brexit circumstances simply because like you mentioned we are resilient on the currency, we have forex reserves which are at all time record highs and over that one of the fallouts could be lower commodity prices globally as well and hence India would be one of the key beneficiaries of that, so net-net we could see higher FII inflows by the end of this year and we could possibly outperform all other global markets.
A: Historically, that has never happened, so every time we thought that India would decouple that didn’t happen, hopefully this time could be different. If you contrast India with what’s happening in the rest of the world where you have these anti-trade, anti-globalisation, anti-immigration voices becoming so strong India has carried out the most impressive foreign direct investment (FDI) reforms in its history in last two years and its across parties so even at the centre where you have BJP and NDA, but even a party which is let say CPM getting elected in Kerala talking about the FDI reforms and more opening ups, so that’s a big contrast.
Second contrast where central bank is cutting interest rates to negative levels, printing more money, we have positive real rates and really strengthens the overall macro framework, the policy framework. Foreign exchange reserves which are depleting in most of the cases here they have been growing, so on a relative basis I think we are better placed, but again as I mentioned that historically because someone rightly said we are a nice house, but in a bad street so if there is a risk off, all emerging markets gets outflows, we may also get impacted we won’t be completely insulated, but the dependence on foreign flows has gone down and that’s why the vulnerability on global money or on the global sentiments relatively this time is less.
Anuj: IT is down and clearly that’s the direct Brexit impact right now, what about companies exposed to the UK and European Union in particular. We can say that overall India dependence on EU is not much, but a lot of companies have quite a bit of dependence on the region.
A: Actually, that’s an immediate reaction that yes UK economy may slowdown, the currency has already depreciated, may depreciate a little more, so companies operating out of UK or having exports to UK will get badly impacted, but that’s like a more linear straightforward view, but we don’t know as I said that this event will have lots of repercussion.
Everybody is saying that Great Britain may become a little England; I don’t know, let’s wait and watch how the process of negotiations goes up, maybe a few years later the Britain comes out to be a more open economy instead of a closed economy and some of those companies may benefit. Of course, the companies that have impacted by the sterling fall today, but I assume that some of those companies would be aware I assume that some of them may have hedged their positions, so we will have to wait and watch.
Ekta: Well, one of the things that we do know is that the US elections are coming up. Do you think that is something that the markets are going to start tracking much more closely simply because of the Brexit event and now maybe the probability of a Donald Trump not being ruled out entirely?
A: That’s what I mentioned in the beginning this is not a one off event, this reflects some of the larger trends which are underneath, so the voices of anti-globalisation, anti-trade, anti-immigration are getting louder, people have already started talking about Brexit, we don’t know what are the other things that are likely to happen in EU and as you rightly mentioned that in US also the political debate is getting quite polarised because of this event. Last 30-40 years we have seen a huge benefit to the global economy from a free movement of goods, labour and capital.
Definitely there are no walls getting created, but I think clearly visualise some speed breakers coming to that. Maybe, there is a section of population particularly in the western economies feeling that the best of the globalisation benefit that could accrue to us are behind us. We are not seeing incremental benefits and we need to probably be a little more inward looking and we have to look at our own interest rather than what’s in the global interest. I think this is likely to last for a little longer than what anybody thinks at this point in time and I am sure not only the US elections, but even the political debates in some of the other parts of the world will have to be take cognisance of by most of the investors.
Anuj: You are sounding quite realistic, not as optimistic as some of our earlier speakers. What’s your sense do you think the index stays in a range and it remains bottom up stock pickers market or do you get a sense that the bull market climb wall of worries and at index level makes a new high. What’s your prognosis on that?
A: My worries on the global front, not so much on the domestic front as I rightly mentioned that fortunately we have huge amount of reforms, we have massive particularly the opening up of the FDI, put yourself in the shoes of any global company and if you are in the boardroom and looking at the world today should I invest in UK, should I look at EU. Look at the politics and the economic situation in the US, Latin America, China and India really looks very attractive, so we can actually be an oasis of hope. If you ask me about FDI, I think the flows will continue to surprise on upside and that will have positive impact on the market as well, but as I mentioned that we may be less impacted by the global movement of capital, but we will not be completely insulated. For example, few minutes back the People’s Bank of China depreciated the currency by 0.9 percent, if they do more because they feel the heat because of what’s happening Brexit and EU definitely rupee is going to get impacted. We need to be prepared for that, but thankfully we have good leadership and relatively the macro is better position to handle those global challenges.
Ekta: Is there any portfolio change that you might be considering or you already consider in light of the developments, maybe a more domestic focussed portfolio and the reason I ask is that we have a lot of domestic based companies which are gaining today, from the diagnostic space such as Thyrocare, to Bajaj Finserv from the insurance space that seems to be the theme playing out. Is that something that you consider which might be completely insulated or fairly insulated?
A: No, obviously the domestic consumption right from the expectation of better monsoon, the Seventh Pay Commission, rising income, the overall consumer space looks good, urban consumption has clearly reviving. On the investment side the government spending at least on some of the sectors like roads and railways is helping us. You mentioned about the healthcare companies which are focussed on the domestic side, cement can do well, overall chemical, agrochemicals space so there are several of those bright spots on the domestic side.
From a global perspective, some of the companies in the IT and pharma have got impacted for a variety of reasons without getting too much into details, but if the stocks correct more because of what has happened in Brexit or the exposure to UK or the rest of Europe, maybe even some of those companies may become attractive at lower prices because those risk are getting into the price and at least if the rupee depreciates that could act as a tailwind. I mentioned that there are challenges for the world, there are challenges for the global economy, but it is not coming to an end. I am sure some of our companies definitely can do well over a longer period.
Anuj: Just a word on anything that you would want to completely avoid. We have seen so much rallies in domestic companies, but valuations have run up a bit, whether it’s NBFCs or some of the domestic cyclical anything that you would want to avoid right now.
A: As you rightly said, whatever you like because the fundamentals look good in that space, to some extent it already reflecting in the price and wherever people have concerned whether those companies that have lot of financial leverage or companies that have exposure to those economies which are getting impacted today and it is already coming into the price, so it’s becoming little tricky.
Over the next few weeks, few months I assume that the global concerns that we have at this point in time doesn’t meant it is bad for every company, maybe at a price some of these balance sheets when I talked about IT and pharma they don’t have the leverage and some of those companies at a price may again become attractive. We used to own them for years, maybe again there could be a time to look at them again if the price really becomes in your favour, while you continue to focus on the domestic players, both the consumption and investment side.
Ekta: Would bank feature in the domestic play?
A: Over the last couple of years our preference has been for retail lenders, that segment has been doing pretty well. I think that continues we have been staying away or had a very little exposure to corporate lenders because of the reasons that are well known. I think that stance continue at this point in time.The Great Diwali Discount!
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First Published on Jun 27, 2016 11:50 am