Q. Domestic equity market are looking highly volatile. How can investors be positioned to face the ongoing market conditions?
A. At present, markets are facing significant headwinds from global disturbances. We expect these headwinds to continue unless global bond markets and currency markets stabilise. During this period we are advising clients to exercise caution and remain highly selective in their investment decisions and trading strategies. For investors we believe that the current market scenario offers genuine opportunity to individual investors entering markets through the Mutual Fund SIP route. Investors who already have sizeable exposure to equities should wait for markets to stabilise.
Q. Sensex and Nifty have slid over 20 per cent from their highs, Do you think markets can plunge further?
A. In case of further damage to global markets and continued selling by Sovereign Wealth Funds. Nifty may retest and possibly break the immediate levels traced out in February’16. However, frontline indices may have already gone through the major part of correction in terms of price and we expect them to spend more time in a broad range. The broader markets will undergone some more amount of time and price correction as valuations correct to appropriate levels.
Q. What is your expectation from the Union Budget 2016?
A. The key obstacles that the economy is facing currently are: subdued rural demand and deteriorating bank balance sheets. We expect the government to take corrective measures to tackle these problems. On the rural side, there is sluggishness due to two bad monsoon seasons coupled with judicious MSP hikes. This coupled with falling international prices has led to rural wages slowing down substantially. The government has reiterated the importance of the rural economy in its communications and will take steps to provide relief to the rural economy as well as to help support consumption. The FM could look at increase in allocation for public irrigation systems, Revamp of MGNREGA and rural infrastructure development initiatives. In Jan 2016, the government also announced a fresh version of the national crop insurance scheme, hence we could expect increased budgetary allocations for the same.
Another sector that need attention is banking. Due to the balances sheet clean up ordered by RBI, non-performing assets (NPA) in the Dec FY16 ending quarter have increased by Rs 1 trillion from the previous quarter and provisions against bad loans have surged 90 per cent QoQ. The government is likely to provide a substantial amount for recapitalisation of banks to restrict further pain in this sector.
Last year, the government had stressed on infrastructure development. Public spending to boost infrastructure is likely to continue this year as well. We expect the government’s capex for roads and T&D to increase substantially in the next fiscal. There is also a possibility of the government introducing a consolidated tax payment system at group levels for infrastructure companies. This will help the sector as most companies have an extremely stressed balance sheet coupled with some unviable projects. Hence, reducing the tax burden to a certain extent will be positive for the sector. The government has also been increasingly giving importance to the start-up India program. Hence we could see some measure around this as well.
Q. Are you concerned about falling inflows from institutional investors?
A. Institutional investors continue to remain an important segment of the market. Emerging markets as a whole has undergone through a prolonged period of selling. FII flows are generally a lagging indicator. With a large part of FII selling behind us we need to look forward towards indication which can reverse this to inflows into local markets. One of the key indicators is the US Dollar strength.
US Dollar as measured by the US Dollar index has appreciated nearly 25 per cent since end of 2014. This period has caused massive outflows from emerging markets. At first local markets were partly insulated from this outflow from emerging markets as India benefitted from falling commodity prices. However lately we have seen FII’s selling increase substantially as a number of sectors in India has come under pressure. US Dollar strength seems to be turning into weakness.
The recent comments from US Fed and other central banks are indicating a period of weakness for currencies. This is expected to lead to inflows for emerging markets and some revival for commodity markets. We believe important indication for flows will come from commodity markets and currency markets.
Q) How do you see banking space in the present market scenario? What advice do you wants do give to investors?
A. The banking space seems to be divided into two clear segments – the retail lending dominant segment and the basic industry lenders. Barring a few banks which have majority of exposure to retail lending the other part of banking sector in India is still reeling under lot of stress from non-performing loans. With RBI pushing these banks to clean up their balance sheets by March’17 the recently released financial results tell a grim story. In the long run, the clean up of bank balance sheets is going to be a major positive for the banking sector and the economy, however for the next few quarters it would remain a source of stress for markets. Currently we are advising clients to wait for further clarity on the incremental stress on balance sheets of banks, especially the large PSU banks.
Q) For which sectors this budget could be a game change?
A. I believe, the Union Budget 2016-17 could positively impact low cost housing, bank – announcement of banking recapitalisation, startup companies – clarity on incentives to startups and Manufacturing sector on incentives and ease of doing business under ‘Make in India’.
Q. What advice do you want to give to investors in the present market conditions?
A. Stock markets have seen a large correction ahead of the budget and expectations are quite subdued. In this scenario the budget may have an advantage in signaling that the government remains even more committed to the reforms process. Surprises on increasing tax deduction limits on housing loans, relief for individual tax payers especially after implementation of the seventh pay commission and clarity on GST roadmap will be positive. Global headwinds are dominating the trend in stock markets currently and we are advising investors to wait for clarity from budget to scout for specific investment opportunities.
