Indian equity market looks attractive from a long term perspective with the current valuations at reasonable levels.
Indian equity market looks attractive from a long term perspective with the current valuations at reasonable levels. In a conversation with Financial Express online, Harshad Patil, chief investment officer, Tata AIA Life said the market offers an attractive entry point for a long-term investor with a 3-5 year view and hence can be considered by an investor for allocating more towards equity at these levels as long as they have a 3-5 year time horizon. Excerpts from the interview:
Q. Concerns over slowdown in China and pending domestic reforms unnerved foreign institutional investors in August as they pulled out over Rs 17,000 crore from Indian equities during the month. The amount is higher than the outflow witnessed during the global financial crisis in October 2008. In the present market condition, can we see foreign money coming into domestic equity market this year?
A. The month of August saw the Indian equity markets weighed down by global uncertainties due to yuan devaluation, sell-off in commodities and domestic factors such as a sub-par monsoon and political stalemate resulting in an unproductive monsoon session of the Parliament. Given the confluence of these factors, it is true that the foreign institutional investors (FIIs) have pulled out a fair chunk of their year-to-date inflows in the month of August. However, it is heartening to note that the domestic institutional investors-both insurance companies and mutual funds have bought roughly the same quantum of Indian equities in August.
I am hopeful that the FII inflows will continue this year as more clarity emerges on the imminent interest rate hike in the US and as Chinese currency and equity markets stabilise.
Q. How do you see metal stocks in context with China slowdown?
A. We see that the global commodities are trading well into their cost curves and historically they have found support at these levels. While a knee jerk reaction of metal stocks in the near term on account of a slowing Chinese economy cannot be ruled out, we expect a rebound in this beaten down sector in the medium term as the global economic growth firms up. Any support from the government can act as a catalyst to change the sentiment in this sector.
Q. Sensex declined below 25,000-mark for the first time in the past 15 months on September 7 and it was just 700 points higher from the level when Modi-government was formed. Can we see further correction from here onwards? Where do you see Sensex and Nifty by the end of this calendar year?
A. We would not like to put down a number for the benchmark indices but do believe that the reforms undertaken by the government has set a firm platform for a 8 per cent growth trajectory over the next three years. This sustainable high growth environment does act as a catalyst for kick starting corporate earnings which in turn will drive the benchmark indices to an higher range over the next three years.
Q. How do you rate Modi-government in terms of economy and reforms?
A. The government has initiated a series of reform measures over the last year by increasing FDI limit in key sectors like defence and insurance, successfully undertaking transparent coal and telecom auctions, deregulating diesel prices, rolling out the direct benefit transfers for targeting LPG subsidy, Jan Dhan Yojana for financial inclusion and increasing the spends in key infrastructure sectors such as roads, railways and power.
Some of these initiatives are constrained by high gestation periods to deliver optimal outcome in the near term but they do provide a strong base for sustainable high growth in the coming years. Going forward, structural reforms such as GST as and when rolled out, will open up more space for a high growth environment. To the government’s credit the reforms, though incremental, has been continuous, sustainable and focused towards raising the trajectory of economic growth.
Q. With the announcement of smart cities, which sector may get the maximum push going forward and why?
A. Smart city project will act as catalyst providing opportunities to a host of sectors. Technology enabled solutions in e-governance, IT connectivity and digitalisation offer opportunities for corporate in the IT space even as urban infrastructure focused companies will find ample opportunities in ensuring clean water and solutions around sanitation including solid waste management. A slew of companies across sectors will benefit from initiatives to assure electricity supply, ensure efficient urban mobility and public transport, focus on affordable housing, enhance safety and security of citizens, target state of the art solutions in health and education.
Q. What is your investment strategy in the present markets? What advice do you want to give to investors who are stuck with their investment plans in the ongoing correction?
A. Indian equity market looks attractive from a long term perspective with the current valuations at reasonable levels. In the short to medium term, the direction of the market would continue to be determined by FII flows as well as key macro events shaping the country’s economic agenda. In the current scenario, we continue to be invested in stocks that are relatively undervalued, offer strong visible earnings growth and have managements with proven corporate governance practices. We would evaluate stock opportunities based on growth outlook. We have a suitable mix of growth and value stocks in our portfolio and would look to invest in stocks that offer growth at reasonable price valuations.
We would advise the investors to take the near term volatility of the equity markets in their stride and stay invested. We are positive about the Indian economy in the long term and would recommend that the policy holders stay invested over the long term for wealth creation. Moreover, we believe that the market offers an attractive entry point for a long-term investor with a 3-5 year view and hence can be considered by an investor for allocating more towards equity at these levels as long as they have a 3-5 year time horizon.
Q. What are the factors which put pressure on domestic equity markets this year? Which factors may give direction to markets in near future?
A. The equity markets have had to bear the brunt of global uncertainties, sub-par monsoons and muted earnings of India Inc over the last six months. The markets will be in better shape as clarity emerges on the US Fed’s lift-off of interest rates, as the Chinese markets stabilise and as the earnings of corporate India improve due to lower input cost due to benign commodity prices, a favorable base effect and as companies in a host of sectors benefit from a series of reforms initiated by the government over the last year or so.
Q. As corporate earnings remained muted in the first quarter of the ongoing financial year. How do you see second quarter for corporates in terms of profitablity and revenue growth?
A. The earnings are likely to be tepid in the near term as the improvement in the macro environment would take some time to percolate into corporate earnings. The benefits of lower raw material costs however, has started reflecting positively on the margins and profitability for a cross section of companies across sectors and this trend could play itself out in a greater measure over the next few quarters. We believe that while revenue growth may remain muted in the immediate quarters, the earnings growth can see meaningful upgrades over 12 months.