S Naren, Chief Investment Officer at ICICI Prudential Asset Management Company.
In last couple of months investors have seen massive volatility in the stock markets due to Greek debt crisis and China’s economy slowing down. What’s your view whether this could impact Indian fundamentals and growth?
S Naren: With the global markets recuperating from the aftermath of Greece crisis and China sell-off, the spotlight is back on emerging markets. Ever since the US Fed has been talking about raising interest rates, global investors are beginning to realign their portfolio allocations. The global emerging economies of Brazil, Russia, South Africa, Indonesia and Turkey are all grappling with a higher CAD, and lower commodity prices which means that their growth rates could stagger for some time, and so their outlook remains cautious. Indonesia, Turkey and South Africa have high CADs, while China’s growth has been slowing and its stock market movements have seen a fair bit of volatility lately.
India, by contrast, has a much lower CAD that is projected to be around 1% or thereabouts. Lower commodity prices, especially oil, provides room to lower input costs for Indian companies and helps boost macro savings. Inflation is low and under the RBI’s target rates. No doubt here, India remains a bright spot among emerging markets and therefore an attractive investment destination.
There seems to be a great deal of pessimism in some quarters of India Inc about the lack of progress on the reforms front. How big a threat to the India story is the government’s inability to push through some key legislations?
SN: A big challenge for the government has been to rekindle India’s economic recovery, against the backdrop of high expectations. The government has made progress in terms of reforms. There could be legislative roadblocks, however, we do see sufficient action on the ground, particularly on the roads etc. which could pave the way for robust India’s recovery.
Which policy reforms / bills you are looking forward to get passed in parliament at the earliest with regards to benefit of the market and contributing to growth of the economy?
SN: Going further, land reforms, GST and ease of doing business in terms of labour reforms and time bound model of giving clearances are the key reforms that need to be implemented.
There’s talk of currency wars. How will the continued devaluation of the Yuan impact us and the global macro dynamics?
SN: In a widely discussed move, the Chinese currency has been depreciated by nearly 3% in last few days. There is an apprehension that this can cascade into a significant depreciation of the currency which can affect the prices of many goods as China is a manufacturing superpower. However given the country’s vast foreign exchange reserves and current account surplus, it is likely that the policy makers will be able to limit the currency movement to a narrow range. While the global markets are recovering from the aftermath of Greece crisis and China sell-off, they are likely to be volatile till the first interest rate hike in the US is digested.
How do you see key macro indicators panning out over the short to medium term? How do you see these factors impacting corporate earnings in FY16 and FY17?
SN: The Indian corporate sector is still heavily leveraged, so it might be a while before these companies start to invest in a new capex cycle. But the good news is demand in certain pockets like autos have been strong. We are at the bottom of the gross domestic product (GDP) growth cycle, which should drive earnings over the next three years. However, the earnings increases will be more back-ended than front ended, which means that FY17 and FY18 is likely to clock earnings growth of about 18-20 percent. Lower commodity prices could drag earnings growth. So expect moderate returns from equities. This can change for the better if the infrastructure and real estate sectors start to see a robust deleveraging cycle.
Are there any particular sectors investors should be betting on?
SN: A cyclical revival could eventually happen. Consequently, cyclical sectors like infrastructure and financials could do well in the long-term. Also, given the fact that rupee has appreciated substantially when compared with Euro, IT sector which has been hurt by this rupee movement is likely to benefit, since we believe that rupee is not likely to continuously appreciate against Euro.