India will likely see a revival in corporate earnings due to favourable macroeconomic conditions, says Gopal Agrawal, chief investment officer, Mirae Asset Global Management (India).
The revival in earnings will lead to a broad-based rally in Indian stocks, he told BloombergQuint in an interview. While a rate hike by the U.S. Federal Reserve will portend short-term volatility, the impact is unlikely to play out in the medium-to-long term.
Here are edited excerpts from the interview.
With a low interest rate environment globally, and an impending rate hike by the U.S. Federal Reserve, how do you expect fund flows into emerging markets like India to pan out?
We are definitely in for a low interest rate environment for a long time. Any rate hike in the U.S. will lead to short-term volatility in emerging markets. But U.S. rates will remain quite low for a long period of time so there will be continuous hunt for yields. Emerging markets like India fit well into this scenario. But we need to keep a check on inflation and maintain a good current account deficit, which is the situation right now. So despite potential short-term volatility, we continue to remain constructive on flows into the Indian market for the medium-to-short term.
Are you seeing signs of pick-up in corporate investments and the capital expenditure cycle?
The corporate investment cycle is not picking up that well. Barring some improvement in efficiency or resolution of bottlenecks in the corporate sector, we haven’t seen any major capex announcements by any of the major companies. One exception is the energy sector which is in the pink of health and is seeing good investments.
How important is a revival in corporate earnings growth revival to support Nifty valuations?
Earnings revival is critical for medium-to-long term performance of the market. In the last 3-4 years, businesses which have seen double-digit earnings growth are trading at significantly higher valuations and vice-versa. There will be some revival in earnings as wholesale price index inflation has turned positive after a gap of 12 months. So this earnings revival could lead to a broad-based rally in the market.
How are you positioned on information technology stocks, especially post TCS and Infosys earnings because margin fears still persist for most of these companies?
The margin pressure is really a structural issue. These businesses are shifting from legacy to digital so any transformation is painful to live with it. So the margin decline is structural but we are still constructive on the sector because of volume growth of these businesses. Stocks are trading at commodity valuations due to the continuous decline in margins but they may not fall much further from here. But we don’t see any triggers for a big rally in the sector.
You manage the Mirae Asset Global Commodity Stocks Fund. Steel companies and downstream oil companies have seen a strong run-up – where do you see oil prices headed?
Oil downstream companies have done well because of two things. The collapse in oil prices has led to an increase in worldwide demand for energy. We have seen a 1.7 million barrel increase in oil demand in 2015 and, as a result, refining margins have shot up.
Second, due to lower energy prices and the reforms undertaken by the government, the subsidy burden for downstream oil companies have come down materially. Because of these two things – and the fact that we have seen a reduction in interest rates as a result of which working capital requirement has come down – refining margins have been good. So the downstream companies have done well.
My sense is that going forward, oil prices will remain rangebound. The Saudis will try to defend $40 per barrel and Shale’s reduction of cost of production may not allow it to cross $65 per barrel. So oil is likely to remain in this band, which augurs well for a country like India.
We don’t see too many non-banking financial companies (NBFCs) in your portfolio. Are expensive valuations worrying you?
We were one of the few to have participated in the NBFC rally. So we made good money there. At the current valuations, we have trimmed our positions. But we are still constructive on the NBFC space. India is still an under-banked country and we will continue to see good retail growth going forward. NBFCs will benefit both from a scenario of falling interest rates and healthy credit offtake. At current valuations, we are watching them carefully and we will increase exposure in the times to come.
Which theme do you think could be the next NBFC over the next 2-3 years?
I would say housing finance companies are attractive. Housing finance today is 60 percent of retail earnings. So retail lending opportunities will exist in many spaces. The government’s crackdown against black money and focus on banking and digital transaction will lead to more credit penetration.
What sectors are likely to lead the next leg of the bull run in our markets?
In the next 2-3 years, there will be greater normalisation of earnings. It will become more broad-based. There won’t be one particular sector that will lead the market. Instead, we will see a more broad-based rally.
Any tactical plays or themes ahead of the U.S Presidential elections and December FOMC meet?
Currently, all these things will have a short-term impact on the market because ultimately earnings and liquidity drive the market. So Fed rate hike will lead to some volatility. Also, the Fed will be reluctant and will go slow on further rate hikes, which will have a positive impact on the market in the medium-to-long term. So in the short term, it is better to stick to quality, domestic-oriented businesses.