A number of positives supported a 18% earnings growth during FY20-24. As a result, markets also performed very well, said Shridatta Bhandwaldar, head of equities at Canara Robeco MF. He tells Ananya Grover that investors should temper expectations and stick to conservative equity products. Excerpts:
1. What will be the impact of 50% tariffs on Indian equities?
The way the US administration has been operating, you can have a sudden change tomorrow. It depends on how the Russia-Ukraine war gets resolved, at least in case of the additional 25% tariffs. As a base case, a 20-25% tariff is going to remain at least for next six months and so on an annualized basis at least 25 basis point of impact on GDP is expected. Additional 25% over the next two quarters will go away because it is not sustainable even from an importer’s perspective. One of the silver linings we see is that commodity prices will remain in check and that is positive because we import a lot of commodities, particularly the energy side. Second is that if the US keeps behaving this way eventually a lot of investors including central bankers will have to think about how much allocation is to be made to the US and people will think about other geographies in terms of incremental capital allocation.
2. Will India benefit as it is the least preferred Asian market now?
That is because our valuation has relatively been on the upper side and the earnings have been on the sideways for the last one year. If the corporate earnings come back in 2-3 quarters, all the FIIs will come back because there is no structural challenge. The government balance sheet is okay, current account deficit is okay, macro-economic stability is good, inflation is under check, there is no currency related issue. The only challenge that we have is growth versus expectation. Between financial year FY20 to FY24, we had 17-18% earnings growth because government capex, real estate and bank credit cost worked in our favour. It could have continued had the private capex and private consumption started moving forward. Since the capex moderated from Govt side and private consumption has still not moved above average; Nifty earnings moderated to 6-7% in FY25. We expect earnings growth to directionally move back to low double digit CAGR through FY26E/27E.
3. FIIs are constantly taking out money from the secondary market but adding in IPOs. Till when will DII flows sustain?
Wherever FIIs are coming in, it is a more stock specific call but in allocation everybody has gone underweight. This is also an opportunity. From the second half of the year earnings growth should gradually start trending towards mid double-digit numbers which is a respectable number for India’s ROE. DII flow is structural. There are fluctuations, but generally Indian investors can easily allocate the kind of number it is allocating based on just the overall saving pool. There are a little bit more excesses in the last 1 or 2 years but that always happens in the market when people look at previous 3 years returns and then start extrapolating the same for future. So the part of that saving pool which has come with the expectation of making 20-30% CAGR, that part will go away but base SIPs who understand that this asset class through 5-10 year can give one low double digit CAGR which, worst case versus my rest of the choices, that will keep coming in.
4. What strategy are you following in flexi-cap schemes?
We have been conscious about allocation to particularly small caps. Mid-caps, we are okay because earnings growth has been holding up better. We have a 70:30 mix of large and small and largely as a mix and we are okay with that given the earnings context that is there. If opportunities come we will increase mid cap, small caps in flexi strategies. In terms of sectors, the overweight are basically large financials, insurance companies, exchanges, asset management companies, Consumer discretionary space, hotels, hospitals, telecom, pharma.
5. What is your view on consumption after recent GST reforms?
The mass consumption part is two wheelers, below 10 lakh cars, consumable durables, staples, building material products, a lot of that part of the market has really been kind of whacked out of shape. I am not saying every space will do well, but the non-luxury consumption part is the part where people should actually kind of focus to find large opportunities. There is a top-down cash flow movement from governments to masses in terms of Income tax benefit, social welfare schemes, surplus liquidity, Interest rate cuts, GST cuts(expected in October).