Pick stocks with least exposure to global economy:ICICI Pru

Anuj: First a word on the way the market has set up after the Fed event? Do you think we have made a bit for durable bottom and we can move on or do you think the market can still seek lower levels?

A: A lot depends on how the whole configuration of dollar and commodities move. Globally, we have reached a point where deflation is a big worry and we have seen crude make new low and dollar still seemed strong even after the Fed meet.

So, what needs to happen for healthier emerging markets (EM) is a change in the trajectory of the dollar and commodities. We do need to see some inflation coming back in commodities because the almost vertical fall in large markets like oil what they do is kind of threaten macro-stability because obviously you will have lot of economies which are oil producing undergo lot of stress and if dollar continues to appreciate, then there is a mountain of dollar denominator debt in the world which will be under stress. So, a durable bottom will probably be made when we see a certain amount of inflation in commodities and a stability in EM currencies come back.

Ekta: One of the things that stood out during the week was the mid-year economic review where the fiscal consolidation which was stated might in fact be something of a challenge in the coming year. Your sense of whether that would eventually weigh on the market if in case the fiscal deficit target is not met by the government, say in FY17 and not FY16?

A: Fiscal deficit is one of the more important economic parameters definitely and it kind of ties in with what I was saying because even if you see how it is shaping up in India the challenge is now the nominal growth. So, one of the reasons we will see some challenge on the fiscal front in spite of the government doing a lot of good things for example, they have raised excise revenues and indirect taxes to my mind have actually been very buoyant given the commodity prices. So, in spite of those benefits what is happening is you have such low nominal growth which affects both numerator and the denominator in the sense that your taxes are eventually linked to nominal growth and your denominator is your nominal Gross Domestic Product (GDP).

So, as I was saying basically the world needs to have higher nominal growth at this point of time and if that doesn't happen you will see problems in China, you will see fiscal deficit issues in India etc. They all come back to the same thing that at this point for a healthy global economy you do need to see some inflation in commodities and some nominal growth.

Anuj: But what should be the portfolio approach from here on. We are almost at the year end. A look at the Nifty and Sensex would say that it was a big down year but if you take a look at some of the midcap funds or some of the midcap portfolios they have done extremely well. Do you think that kind of trend is going to continue?

A: Obviously, a lot of bottom up stock helps in midcaps but it is also driven by the fact that if you see the mix of flows the Foreign Institutional Investors (FII) flows have been quite muted and the domestic flows have been pretty strong and the domestic flows, the proportion going into midcaps does tend to be much higher. So, the outperformance of midcaps versus large caps a large part of it is just also driven by this mix of flows.

Now going forward from an overall sectoral perspective I would think that today we are in a market where because defensives have done well over last three to five years and Indian macro by itself is looking quite okay. There is a chance that domestic cyclical may outperform but obviously you will have to kind of choose stocks which at this point don't have probably a lot of exposure to the global economy because that is where the deflation is coming from. That is where the stress is coming from. So, it is going to be very mixed. I don't think a pure quality portfolio for example won't outperform a lot, neither would a pure cyclical or leveraged company portfolio would outperform. It is probably going to be a mix of these two.

Ekta: What is your sense in terms of the banking space? We saw the marginal cost of funds, the final recommendations which came out from the Reserve Bank of India (RBI) this week and that is expected to be much more detrimental in terms of floating rate banks which would be more public sector undertaking (PSU) banks but the impact on the net interest margins (NIM) are not expected to be as much as the draft recommendations. Would you be a buyer into PSU banks in this context?

A: While this marginal rate thing is important but at this point of time if you look at corporate lenders both private and PSU the main issue is actually asset quality and a lot of focus will be there. That if you split into two halves, one is issues related to the domestic side which is infrastructure, power etc and two is issues related to global cyclical sector like steel, aluminium etc. Now, if you look at these two segments obviously the first one is on the mend because you are seeing a lot of policy, a lot of things being done by the government to alleviate the problems there.

The second part is a relatively new development over the last six to nine months because of the almost vertical fall we have seen in the commodity prices. So, our approach to banking specifically for corporate lenders, the retail banks are doing fine. The consumer in the Indian context is relatively unleveraged, there is no issue of very high debt to income or anything of those parameters on the retail side. On the corporate side what we need to monitor is how asset quality pans out within these two segments.