says S Krishna Kumar, head, equity, Sundaram
MF. In an interview with
Ashley Coutinho, he says the key mantra in the market right now is to stay invested. Excerpts:
Equity markets have seen a significant uptick since September last year. Will we finally see MF investors coming back now
Valuations are quite reasonable at around long-term averages, considering the fact that this is the first year of the impending economic upcycle wherein one is looking at a 16-18% earnings CAGR for the next 3-5 years. Indian macros have and are showing improvement and this places the country very favourably in the EM landscape. FIIs have been actively increasing exposure over the year while domestic investors have started to come back in the last four months.
A historical analysis of their behaviour shows that the confidence level increases with a year of strong positive returns. The household savings in financial assets, particularly in equities, has been at decadal lows and we expect this trend to reverse in the medium term, pushing in over $10-20 billion p.a. into equity markets. The key mantra in the market right now is to stay invested.
What is your outlook for the equity market in the year ahead
Corporate earnings have bottomed out last year and seem poised to settle into a high teens kind of growth. A cyclical uptick in the economy in the backdrop of an improving global growth outlook is expected to get clearer over the next 3-6 months.
India remains a favoured market among institutional investors, given the structural improvement expected in the economy in the medium term, driven by government reforms and recovery in the investment cycle. The economy seems on track to move into an accelerating growth phase over a 3-5 year period.
The near-term event risks remain the weak geopolitical issues in Ukraine, Iraq and Gaza. Global markets are also going to be impacted by the tightening cycle in the US on the back of a strengthening economy, which could create short-term volatility. In the medium term, investors should look forward to a 20-25% p.a. CAGR equity returns, depending on the portfolio positioning and inherent risk.
What is your assessment of Q1 results so far
As expected, defensive growth sectors like software, pharma, FMCG and telecom have delivered growth, while the economy sensitive sectors like banking, real estate, infra, construction, capital goods, cement and metals have continued their weak showing. Business leaders have shown renewed confidence in their businesses and outlook for the economy at large. Growth could get stronger going into the second half this year and
FIIs have put in more than $12 billion YTD. Do you see strong inflows continuing in the year ahead
India has shown tremendous improvement on the external sector lower CAD supported by steady capital flows. The government seems committed to fiscal consolidation through elimination of unwanted subsidies, well-directed capital allocation to plan programmes funded by creditable funding strategies. A powerful leader with a clean execution track record, an inclusive growth agenda and a positive investment climate for FDI are a welcome combination.
India doesnt face many of the problems faced by other EMs like Brazil, China and others, and is well placed to be a favourable investment destination for FIIs.
Which sectors are you bullish on
Cyclical sectors like cement, metals, construction, industrial, capital goods and financials will benefit most from the economic recovery. The Indian economy has been bottoming out in the last three quarters. The reform, policy initiatives of the new government could revive the broken investment cycle and help improve infrastructure sector investments in roads, ports, power, coal, oil and gas sectors. This is expected to accelerate the demand growth in core sectors of the economy, which, in turn, would push up capacity utilisation levels to higher levels with operating leverage benefits. All this could lead to recovery in industrial capex and better supply response across the economy, leading to lower factor costs in the system thereby easing cost pressures sustainably. Another segment where we are positive are companies that have a reasonably high share of exports.