WF: When we last spoke with you (Click Here) in September, you summed up the global market situation as "Two down, One To Go" - the one to go referring to the US rate hike. Now that this event is behind us, how do you see global markets playing out in 2016?
Anand: Indeed, 2016 we believe will be less chaotic than 2015 for global economy and markets. But more importantly for India, the impact of global markets on Indian markets will become much lesser in 2016. From here on, for individual companies in India (and thus stocks) what happens in Indian economy becomes much more important than what happens in global economy and this is a significant shift we will experience in market behavior after almost 5-6 years.
While globally, with end of near zero interest rates, the reactions will be mixed. Global growth will be slow as well as commodity prices will remain challenged. We will have significant losers in global markets due to subdued commodity prices. However for country like India, all stars are aligned. The benefits of lower commodity prices, resulting into some monetary and fiscal stimulus will help growth while keeping inflation low. India will have relatively stable macroeconomic situation (within universe of emerging markets) with improving growth.
'2016 has all the ingredients for Indian equity markets to do well.'
WF: You were never part of the 2014 Indian bull market euphoria, and events in 2015 have proven your circumspection correct. How do you see the Indian economy and equity market shaping up in 2016 and what will be the key drivers?
Anand: We were relatively sanguine about our expectations in 2nd half 2014 and entire 2015, as we knew that transmission of macro benefits will take a long time to result into micro level benefits for corporate earnings to pick up. We believed the market reaction to changes in economy were either misplaced or before time and we are proven right. While lower oil prices have improved the macroeconomic parameters for India and market rejoiced, but it actually had very little impact on earnings trajectory. Lower commodity prices; on the contrary, has hurt earnings growth in short term.
However we believe, 2016, will be different. This year we will see transmission of macro improvement at micro level. Significant pick up in both urban consumption as well as select infra segments like rail and roadways. Also the earnings growth at index level will also start looking up. On the markets front, we are quite a lot more positive than we were last year. The key drivers to markets in 2016 will be robust earnings growth in select sectors and very strong inflows into equity markets from domestic investors (as they reduce their exposure to real estate and gold).
WF: "Urban consumption" is becoming a crowded trade in our market, perhaps because other growth engines do not inspire much confidence right now. Is there a risk that this theme is being overplayed, or is there still value in this theme?
Anand: It is unfair to equate 'urban consumption' with just FMCG. It is a lot more diversified and spans across multiple sectors, with some of them still emerging. We believe 'Urban consumption' has still got legs to keep going for next 2 decades.
Within urban consumption, while some segments have matured and thus steep valuations in those segments are not justified. However, there are segments of the markets, within urban consumption, which are at reasonable valuations and or are growing very fast (as they are still emerging sectors) and thus deserves premium valuations.
WF: Some analysts have pointed out that over 50% of the revenues of India's top 100 companies are now influenced by global factors or are dependent on the global economy. Given a weak outlook for global growth, is our large caps space likely to limp along as a consequence?
Anand: Agree. Global economy is important for many of the India's top 100 companies and to that extent recovery in them will be slower the Indian economy's rebound. But that is not such a bad thing as these were the companies which continued to do well in last few years when domestic economy was struggling.
However, it also means that 2016 will be a year when active investing should do better than passive investing. Such a scenario leads to quiet a different earnings growth and stock price performance across sectors (and even companies within same sector). Thus to benefit form 2016 recovery in economy it becomes so much more important to be able to understand nature of recovery, drivers of recovery and thus eventual beneficiaries of recovery.
WF: The Government's inability to get key economic legislations passed by the Parliament - including GST, labour and land reforms, is raising a fear of "policy paralysis" of a different kind. Is our structural growth story under threat due to this?
Anand: There is no denying that smooth passage of above reforms would be positive for economy and markets in medium to long term, but we believe their impact is overstated. Beyond these large reforms, there is enough and more that government and central bank can do today to help growth in India.And we are seeing lots of action and quick decisions being taken. We are seeing massive build up in activities around road and railways and I believe 2016 is the year when we will also see lots of 'on ground' activities and thus will impact job creation and GDP growth rate. Further timely completion of pay commission negotiations will add further stimulus and boost consumption in 2016. On top of it, falling oil prices have opened up opportunity to provide mini fiscal and monetary stimulus in 2016, to help growth.
We believe India's demographics and thus the structural growth story remains intact and it will help India to become one of the fastest growing economies in the world.
WF: What are the key themes / sectors that look promising to you in 2016 and why?
Anand: Within Indian equity markets, one of the most sustainable and profitable segments is Indian middle class household. Most of the companies in our portfolio benefits from rising middle class segment and its rising per capita income. We have companies benefiting from savings and consumption of growing middle class in the country.
Leading the pack is Private sector banks followed by telecom sector, pharmaceuticals, Consumers, auto (incl transportation), select NBFCs, media and cement.
WF: What were some of the key changes you made to your portfolio strategy or holdings in 2015? What changes are you now contemplating to align your portfolio for 2016?
Anand: In 2015, we haven't made many changes as we saw the markets actually played out the way we expected. However due to ongoing slowdown in global economy and expected pick up in domestic economy, we have marginally reduced our exposure to IT services and Pharma and increased our weightages to Private banks, Auto and Consumers.
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