The government?s policy measures, if backed by a credible roadmap for medium-term fiscal consolidation, can help rebuild investor confidence in Indian equities, believes Harsha Upadhyaya, head of equities, Kotak Mutual Fund. In an interview with Ashley Coutinho, he says the outlook for the market over a one-year period seems constructive given the fact that the domestic economy will likely see a benign interest rate environment.

What?s your outlook for the equity market, especially in the light of the reform measures?

These measures from the government were very much needed and we view them as the first few steps in the right direction. If the recently announced policy measures are backed up by a credible roadmap for medium-term fiscal consolidation, it can go a long way in rebuilding investor confidence in Indian equities.

Until recently, there were two primary concerns that equity investors had. First, lack of fiscal room for any possible stimuli, either fiscal or monetary; and, second, lack of policy action from the government. The recent cut in petroleum subsidy is the first step in controlling fiscal deficit and needs to be built upon further with some concrete structural measures.

The recent government actions have tried to revive business confidence in the economy to start with. All these measures are aimed at reviving the investment cycle. Short-term market movements are always determined by liquidity and sentiments. Both these seem to be positive at the moment, and could keep a positive bias going forward. Over a one-year period, the outlook seems more constructive given that the domestic economy is likely to see a benign interest rate scenario, which is always positive for corporates as well as the performance of the equity market.

What are the key triggers for the market going forward?

Any credible plan on fiscal consolidation by the government will be the most important positive trigger for the market. Even domestic interest cuts will be viewed positively. In the current global context, we need to be watchful of any negative event risk.

Do you see downgrades in the coming quarters?

The first quarter results were subdued. We expect this trend to continue even in second quarter. However, we do not expect any significant further downgrades in earnings expectations. Even the interest rates in the economy seem to have peaked. Lower interest rates positively impact corporate performance with a lag of one or two quarters. If we see fiscal consolidation and revival of investment cycle, the fundamentals of our economy will improve further.

What are the global cues to watch out for?

We have seen strong foreign institutional interest in Indian equities in the last month or so. This has led to a sharp appreciation in the rupee. This has also come at a time when global crude oil prices are somewhat softening. If this trend continues, it will reduce our fiscal burden and improve market fundamentals further.

Sectors you are betting on…

We are currently overweight on the banking and financials sector. While we were focusing primarily on private sector banks in the past, we selectively added PSU bank stocks to our portfolio, given their attractive valuations in the last quarter. We are also positive on the media sector due to the impending digitisation and FDI. We continue to be overweight on the cement sector as well. We remain underweight on metals given the uncertain global demand and pricing scenario. Although we have recently added select engineering stocks to the portfolio, we believe that revival in investment cycle is still some time away and, hence, remain underweight on the sector.

What is your advice to retail investors at this point in time?

It is always advisable for retail investors to invest through the MF route. We continue to believe that equities are one of the few asset classes that beat inflation in a sustained manner in the long term. Currently, the equity market is fairly valued and could provide reasonable returns if the reform measures continue and the interest rate cycle peaks. We suggest retail investors to start looking at equities more favourably.