Brace For Volatility In 2018, Says Sunil Singhania
In FY19, India could see 16-18% earnings growth, says Reliance Capital’s Sunil Singhania.
Investors should brace for higher interest rates and more volatility in 2018. That's the word from Sunil Singhania, the global head of equities at Reliance Capital Ltd.
India's macro-economic conditions will remain challenging, but the micro-level performance will improve sharply, he told BloombergQuint on the weekly series Thank God It's Friday.
"We have a stable rupee, we have effects of demonetisation almost gone. We have companies and sectors coming out of GST," Singhania said.
Here are edited excerpts from the interview.
How do you rate economic growth, investment climate, the government reform process, and earnings growth?
Economic growth: 50
Investment climate: 60-65
Government reforms: 75
Economic growth: 30
2017 was dominated by themes like demonetisation, bank recap etc. What according to you will take centre-stage in 2018?
There will be interest rate rise globally; more volatility. In my view, 2017 was a fairly stable year that way. As far as India is concerned, challenging macros, but sharply improving micros.
In terms of earnings, are we likely to see some slackness even in 2018?
We have been optimistic right from 2016, but we have gone wrong. We are reaching a situation where things are now falling in place. So, 2016-2017 end we had a lot of headwinds. Headwinds were from appreciating rupee, we had demonetisation and GST. All those are becoming tailwinds now.
We have a stable rupee, we have the effects of demonetisation almost gone. We have companies and sectors coming out of GST. And if other countries in world who have implemented GST are a barometer, then it will become a tailwind rather than headwind.
We also have the support of commodities generally doing well. So, commodity stocks should report some decent earnings. Corporate banks which were providing a lot, and therefore subduing the earnings overall should not be doing that going forward. There can be surprises in earnings.
Exports suffered in 2017 for India. We are seeing a revival. There is also push from the government to encourage exports. Some of the export sectors contribute towards rising earnings.
Our base case is, in FY19 we could see 16-18 percent growth as far as earnings are concerned.
Do you believe that some of the indices like Nifty 50, Nifty 500 will give similar or better returns next year?
2017 has been a great year for not only Indian equities, but for global equities. U.S. has given 25 percent returns, Hong Kong has given more than 30 percent returns. Across markets, we have seen decent returns. Volatility has been low.
We will have more volatility. We are coming in with high expectations and high base effect.
Our view is that Indian equity markets can give you double digit returns but to expect the return which we got in 2017 is keeping expectations too high.
We have to keep our expectations moderate. If we get high returns, then it is well and good, but we expect mid-teen returns to be the base case in 2018.
What influence can the election of 2019 have on the upcoming union budget?
I am not an expert politically. In India, we have 2-3 elections every year and every election is treated as a mini election. But if you see the action of the government, they have been very consistent.
There are pockets of influences or pockets of concern as far as the government is concerned in the rural economy, which is a cause of concern. So, there might be some sops given there.
We talked about how exports have not been growing. So, export oriented sectors might get sops.
Also, employment is a key concern. You may say that it is also election issue, but it is an economic issue and to address that some high labor-intensive sectors might be given some priority. But we don’t see a socialist kind of budget. It should be in line with what we have seen in last 2-3 years.
If you are not expecting a very pro-rural budget unlike others in the street, does it mean that you are not betting on some of the rural themes?
I would not say whether the budget will be pro-rural or anti-rural. But we are talking about a more populist budget. In the last 2-3 years, the government stance has been pro-rural and pro-poor. So, housing for all, farm income to double in the next five years, that has been the mantra. I think that should continue. Those things will continue to be great things. Whether it is DBT, as far as fertilisers are concerned or doubling of farm income or increasing the yield, all those would be the focus.
How would you incorporate that into your investment strategy?
For us, everyday is an analysis and everyday is an opportunity. Good thing about India is that we are a very diversified country. We have presence of all sectors, whether it is services, manufacturing, exports or domestic. Rural does form a big portion on sectors that we are positive on. So, we are positive on the fertiliser space, consumer discretionary space where rural will be big thing. It is well incorporated already.
Do you think market has priced in a fiscal slippage of 20-30 basis points?
I guess so. Good thing is that the finance minister has gone on record to say that fiscal slippage is not going to be dramatically big.
In FMCG, what is your reading based on utilisation levels and at what point you will think of this manufacturing can reach optimum utilisation which could lead to a capex cycle?
The sectors like FMCG and auto, there is already capex happening. But those sectors are not capital-intensive sectors like FMCG or auto. Good deals have started to happen as far as mergers and acquisitions are concerned. So, there are good assets available. Companies are growing first by acquiring those assets. At the same time, you had Tata steel announcing a good capex. Those sectors will be meaningful. You have metals, you are manufacturing in a big way. You are hearing talking about large electronic majors trying to set shop in India. There has been an increase in import duty from the government for electronics. It indicates that it is a matter of time before large projects are announced.
Economist expect that it will be long period of lull. May be there will be another 25 basis points cut in 2018. But there are some who expects an uptick in interest rates in 2018. Where do you stand in this and why?
At this point, I don’t think there will be uptick. The view that there will be a cut has got deferred largely because there has been an uptick in inflation. For the first six months, our view is that we are in a stable interest rate environment.
Are you taking a call on the private capex cycle which is picking up in 2018? Where are the areas you are seeing green shoots?
In capex, on a major front, it will happen from the government. Around us, whether it is Mumbai or other cities, metro work is going on. Almost, 13-14 cities are seeing either construction activity or are on the verge of construction activity starting. We have seen Udaan where 90 small cities and towns have got connected via the air network. Some airports might come up. There is a big push towards roads, inland waterways. In southern Andhra Pradesh, there is a large push towards irrigation. New capital is being built up. The capex in next two years will be from the government side. Private capex towards the end of 2018 should also start to pick up.
What are your thoughts on financials?
In financials, we are positive on the corporate lenders. We believed that the NPA cycle has peaked. And from here on because of NCLT, government push, and the recovery in some sectors like metals, we can see some positive surprises there. We are also positive on shift from physical savings to financial savings like life insurance companies, asset management, wealth management companies.
How could one play the entire theme of resolution of all this highly leveraged companies?
We are positive on the corporate lenders and we are significantly overweight on corporate lenders.
Do you see opportunities in buying or investing in this companies?
The first beneficiaries would be the lenders. If there is any residual left, then only the equity investor will tend to make money. If the banks are able to get all their money, then they will just fly.
A lot of real estate stocks have been moved up substantially this year. What is it that these prices are factoring in right now?
Equity markets are all about the future. From 2008-12, real estate prices were moving up. But the stocks collapsed to 50 percent or 25 percent of the highs. Because the market was of the opinion that these sales and prices are not going to sustain. The sector which was very poorly managed, and it was unorganised with a lot of black money and lot of other undesirable practices going on, is coming to a more formal and more regulated sort of scenario with RERA and lot of other things. So developers and builders could be at a premium to others in terms of the buyer wanting to buy properties of reputed builders. The good guys all have been benefited out of it as far as investor interest is concern. So, it is a matter of time before the interest starts to come in as far as physical property is concerned but it is more a call on the future sort of advantage which organised developers and builders could get.
What are the big risks that are not factoring now?
2017 was a fairly stable year, low volatility globally. In 2018, there will be more volatility. There is no doubt about it. So, we should be very prepared about it. Global markets have all moved up in sync. It is always a possibility that some event happens in world which could impact India and we should be prepared about it. Now, in India you can’t have a scenario where corporate profitability doesn’t move up. If there are more quarters where corporate profitability disappoints, than these valuations cannot sustain. These are some things which should be taken in mind. Once the election gets nearer, we have seen in past, markets will get little cautious and jittery and we will see that towards end of 2018 too.
What does that mean for some of the global or export link plays?
These are global sectors. In IT, we are positive. One is, the stocks are reasonably priced. The U.S. economy is doing so well. So, there is a possibility of uptick as far as demand in U.S. is concerned. We are optimistic on IT sector. Pharma is stock specific call rather than sector call.
Any lessons learn from 2017 or any resolution for 2018 for investing.
Everyday is a a new learning and a new lesson. We would like that investor should continue to have faith and keep investing without bothering about day to day event. So, that would be an advice.
