Investors can expect 12-15% annual returns in the next 3 years: Bajaj Allianz’s Sampath Reddy

Demand slowdown, poor monsoons, weak global commodity prices (metals in particular) are the key worries for the Indian economy, Sampath Reddy, chief investment officer, Bajaj Allianz Life Insurance told Financial Express online.

Sampath Reddy
Sampath Reddy, chief investment officer, Bajaj Allianz Life Insurance

Demand slowdown, poor monsoons, weak global commodity prices (metals in particular) are the key worries for the Indian economy, Sampath Reddy, chief investment officer, Bajaj Allianz Life Insurance told Financial Express online. He further said that infrastructure sector stands to be the biggest beneficiary of the interest rate cut as most infra-projects typically have higher leverage. Here are the excerpts from the interview:

Q. How do you see a 50 basis points rate cut by the Reserve Bank of India in September and how it will impact banking sector?
A. 50 basis point rate cut was a pleasant surprise and the dovish tone of the policy statement suggests that the monetary easing cycle is not over as yet. This should help in overall reduction in the interest rates in the system. The focus of the policy is now clearly shifted towards kick-starting the economic growth. Banks have already taken steps towards passing on the repo rate cut through reduction in base rate. Lenders would benefit on declining interest rates with respect to their mark-to-market on treasury holdings. But, we do not expect material improvement in margins on sustainable basis on account of cut in repo rate. The more positive impact on the banks is through indirect i.e. through improved credit growth, better demand for credit and reduced risk of NPAs ( Non performing Assets).

Q. How do you see infrastructure sector after the rate cut?
A. Infrastructure sector stands to be the biggest beneficiary of the interest rate cut as most infra-projects typically have higher leverage. However, high interest rates do not represent a meaningful portion of the trouble for the infrastructure sector as a whole. The key issues with some of the troubled infra projects are either on account of availability of raw materials, land or supply price contracts which have to be addressed.

Q. Can we expect a further rate cuts in the ongoing financial year?
A. Yes, I expect a further 25-50 basis points cut going ahead as the RBI is more comfortable on inflationary expectations going ahead. Also, globally most central banks continue with their easy monetary policy hence there are not many risks for us to lower rates further.

Q. How do you see domestic equity markets at present? Where do you see Sensex and Nifty by March 2016?
A. We do not expect a huge upside going ahead over the next 6 months as corporate earnings growth continues to be weak near term. However, with overall reduction in the interest rates, and policy measures taken by the new government should help in corporate earnings growth recovery towards 1HFY17; Hence, very near term, market may not give much upside from current level, but for three years one could expect about 12-15 per cent annual returns.

Q. What are the key concerns facing the economy? Are global issues also having an adverse impact?A. Demand slowdown, poor monsoons, weak global commodity prices (metals in particular) are the key worries. US Fed’s monetary tightening, imploding China and the health of the oil exporting emerging countries are the key global worries.

Q. Do you see a lackluster market for some time or will there be some renewed interest after the recent fall?
A. Clearly the institutional investors (FIIs) are facing redemption pressures and their selling was absorbed by the domestic institutional investors (DIIs). A fresh bout of selling by FIIs can really dampen the sentiments. Also the supply of paper from the Government of India (GOI) as a part of the divestment programme can take out liquidity from the markets. So the markets are likely to be in a range bound till the time the earnings growth really picks up.

Q. What is your take on FII activity that we have seen so far? In the first FIIs half of the ongoing financial year net outlows by FII were over 14,000 crore, how do you see the second half? Do you think this outflow will continue?
A. In the first half, we saw close to $2.4 billion worth of net sell by the FIIs and DIIs who bought a net of Rs 59,000 crore during the same period. Not sure FIIs would continue to sell, the critical part will be whether DIIs are able to match it with their inflows.

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