India is likely to witness exciting times, going forward, inflation is already topping out and the interest rate cycle is about to bottom out soon, says Vikram Kotak, chief investment officer (equities) at Deutsche Asset Management, which manages assets over 23,000 crore. In an interview with Economic Times, Kotak says a clear verdict in the upcoming general elections will act as "huge" catalyst for investment cycle revival and can help India revert to 7-8% GDP growth". Edited excerpts:
How will the US Federal Reserve's decision on tapering impact the Indian economy and its financial markets?
The US Fed initiated tapering of its asset purchase programme by $10 billion, with an indication of continuing at this pace, subject to future economic data. Initial talks of Fed tapering had created extreme volatility in currency as well as equity markets, but this time, India is well prepared on the back of some timely proactive measures taken by the RBI in the last few months.
The gradual withdrawal of Fed QE (quantitative easing) will be beneficial for India in long term, as the estimated US economic recovery will help Indian export sectors, particularly the IT sector. Also, excess money flow will taper from the commodities market, thereby, helping oil and other commodity prices to remain under check which, in turn, should help India in terms of lower inflation and current account deficit (CAD). India should gain in the medium term, as it is much less vulnerable to external shocks now compared to six months earlier.
Foreign institutional investors (FIIs) pumped in over $20 billion into equity markets in 2013. What is your outlook on foreign fund inflows in 2014?
Foreign institutional investors have kept huge faith in Indian equities for a long period and, today, they own over 20% in most blue chips. Their support and confidence in Indian equities is commendable, despite currency fluctuation, steep inflation and a slow economic growth. India is likely to witness exciting times going forward, with general elections next year. Inflation is already topping out and interest rate cycle is about to bottom out soon. More importantly, India's rate of growth is showing signs of recovery with green shoots emerging in various sectors. Growth and earnings estimates probably will not get lower than this. The last quarter is the first in the last 10 quarters where earnings were higher than analyst estimates, both in terms of numbers and quality. India today is in much better position than a year back in terms of current account deficit, as we have seen the $88-billion of deficit in fiscal year 2013 come to close at $45 billion in fiscal year 2014.
Global fund managers are betting on revival of the investment cycle post the general elections, as it is crucial for faster economic growth. How is your fund house playing this theme?
The biggest concern today is revival of investment cycle; unless it revives, India cannot push its growth beyond level of 6%. There are some improvements in approvals and clearances in selected projects, however, high interest cost and slow pace of approvals are big bottlenecks for the cycle to revive completely. Business confidence in new investments is reviving to some extent backed by strong export growth, and strong growth outlook in developed economies will continue to keep momentum going in export growth for a long time. However, it is important to revive investment cycle for balancing supply side issues, which will have positive influence on inflation and economic growth. A clear verdict in the next general elections will act as a huge catalyst for investment cycle revival and can help India revert to 7-8% GDP growth trajectory.
Which are the sectors your fund house is currently overweight on? Are you betting on sectors linked to revival of the US economy?
We prefer sectors relevant to the developed markets, in particular the US economy like information technology and healthcare, and also domestic themes focusing on rural India. We think rural India has a great potential as rapid improvement in infrastructure and and higher rural income sectors like consumer, auto and retail will immensely benefit. We continue to like and remain overweight on the IT sector as it is highly benefited by supportive currency, recovery of demand in the US and Europe and operating efficiency levers. Lower attrition and single-digit wage growth along with significant increase in supply of manpower adds a huge operating leverage to the IT sector.
We are also upbeat on private sector financials as most high quality players have weathered tough times very well, wherein previous quarter was a testing quarter for the balance-sheet quality of Indian financials. As growth has moderated, banks have focused on extracting operating cost efficiencies to generate profitability. Despite a challenging macro environment, private banks continued their strong asset quality performance. Private sector banks have added 4,300 branches (80-85% of 2010 base) in the last three years, which will help them to penetrate more and also their retail mix in the business is increasing. We believe that with an expanded reach, better product offering, improving liquidity conditions, market share gain and an improved growth outlook, private banks will continue to do well in next round of growth cycle.
What is the big investment theme for 2014?
We believe rural growth and e-commerce will remain a very big investment theme apart from exports and investment cycle recovery in next few years. India is at a cusp of explosive growth and can grow much faster in e-commerce business. E-commerce today commands less than 1% of total trade and it is likely to increase manyfold in coming years. On the back of rising Internet penetration (addition of 10 million users a month), smart phone adoption (70 million connected devices) and with most incremental internet connections being added through hand phones, it is a massive business opportunity for e-commerce players and ancillary services like logistics. India's unique invention of cash on delivery model is also the key reason for success in online retail. Rural economy is a very important theme, going forward. Indian rural markets have transformed over last many years, well supported by government spending, surge in rural infrastructure, telecom revolution and wealth effect on the back of rising land and gold prices and good monsoons. A key beneficiary of road connectivity and rural infrastructure is the auto sector, where players with distribution reach and after-sales services benefit a great deal. In the last five years, urban density in telecom has expanded four times whereas rural density expanded seven times on back of low penetration and is likely to expand faster. Increase in gold and land prices have helped consumption and mounting aspirations, while with media and connectivity there is access to premium products and emerging trends. The rising wages at a faster pace than inflation in rural India are not only helping reverse migration but also increasing demand for consumer goods, which is well supported by increased social spending by central and state governments. Rural India is going to be an ongoing investment theme for many years to come and can benefit sectors like auto, banks, consumer, telecom and media.
Many brokerages are saying that corporate earnings have hit the bottom of downgrade cycle. When can we expect some re-rating in corporate earnings?
There appears a trend change in earnings growth trajectory in the last quarter, with earnings growth of 14% in index stocks. We think in the forthcoming financial year, earnings growth can be higher and the quantum of upside is largely dependent upon domestic economic recovery. The rupee around level of 60 versus the US dollar is extremely good for export-focused companies. Revival in the economic cycle and lower interest rates can surprise earnings on the upside in the next two years.
Many economists say the Indian economy has bottomed out when it comes to macroeconomic indicators. Do you agree that the worst of macro data is behind us?
The worst is over for Indian economy: weak industrial production data, current account deficit and consumer inflation numbers are behind us. But it is important to watch if the recovery is structural in nature and whether it will be swift or gradual. We think the recovery will be gradual in current environment but in case of a new strong government, the economic recovery can pace up with focus on execution and clearance. Cyclical recovery in the country is already in progress backed by strong exports and stable commodity prices. The good news is that we are at an extremely low level of growth and the macro indicators seem to be suggesting that we are at a trough now. GDP growth rate has bottomed out and can grow faster than market expectations in the next financial year.
RBI has kept policy rates unchanged at its last monetary policy review contrary to market expectations. What is your assessment of the interest rate scenario?
In our view, interest rates have peaked and we may see at best one more 25-bps hike. As consumer inflation is likely to fall steeply on account of vegetable and fruit price decline, RBI's decision on rates will be dependent on not only inflation but other variables like weaker growth in economy and global liquidity conditions. We believe RBI opines that the risk to inflation is tilted downwards as increased food supplies are expected to lower headline inflation. Tightening of monetary policy since late summer would also help dampen inflation, while appreciation of currency and output gap will help inflation to cool down.
To read the original article, Click Here
To read the original article, Click Here
No comments:
Post a Comment