Large part of calendar year 2016 will remain a function of stock selection until pick up in reforms and capex revival, according to Atul Bhole, fund manager, Tata Mutual Fund. "Now markets are looking fairly valued without not much expectations built in after one year of time correction and slight price correction too."
In an interview with Sourabh Pandhare, Atul Bhole said, "We think consumer discretionary sectors like automobile, building materials, retail and apparels would do well in calendar year 2016."
1. Stock market is expected close 2015 year on a negative note. Sensex has lost 8 percent since December 2014. Do you think 2016 will be better for markets than 2015?
CY2015 was marked by global events like massive correction in crude oil and other commodity prices as well as end of the US Fed easy monetary policy which was going for almost a decade. On the domestic front also, lot of expectations built around reforms and capex revival, had to be toned down considerably due to political logjam. Both these factors have led to considerable cut in earnings estimates. So because of bearish sentiments and weaker earnings growth, there has been de-rating in multiples which has happened in CY15. However, most of the events are now behind and it appears that expectations are on the lower side. Valuations are reasonable at 13-14x on FY17 earnings. There are issues related to specific sectors like bad loans in banking sector, USFDA issues in many pharma companies etc. but there are some silver linings as well like end of capex cycle in some companies, benefit from lower inflation and 7th pay commission to consumer discretionary companies etc. So large part of CY16 initially will also remain a function of stock selection until we see pick up in reforms and capex revival.
2. Foreign investors have invested close to $2.80 billion so far this year, which is lower by 82.70% from net investment of $16.12 billion in 2014. Is the market overly dependent on foreign inflows? Will foreign inflows will pick up in 2016?
This year has marked much lower FII flows as for large part of second half, they were actually sellers in the market. However domestic mutual fund industry is seeing very good inflows and totaled almost Rs.75,000 crores on net basis for CY15. We believe such flows can continue as real interest rates have turned positive after long time gap and other investment avenues like gold and real estate are incrementally not very attractive. So net-net the dependence on FII inflows has certainly came down. Having said this, as we understand, FIIs are still significantly overweight on India with in emerging markets and other emerging markets have corrected significantly making them apparently cheap. So for India to attract FIIs again, the reform process, capex revival and lastly earnings growth will hold lot of importance.
3. What are the key triggers that will drive market performance in calendar year 2016?
During CY16, from the policy side the Union Budget and the direction it tries to give to the economy would be important event to watch. Passage of certain key bills GST, real estate etc. which as of now are seen not happening would be added trigger. Implementation of 7th Pay Commission recommendations and project awards in roads, power T&D, railways etc. would be the catalysts for consumer and infrastructure sectors respectively in the year coming ahead. On the downside, bad loans coming out from the banking system would act as one of the major negative.
4. How are you approaching the markets? What kind of allocation are you making towards different asset classes?
As mentioned earlier, CY 16 will also a year of stock selection. So we are holding or buying companies which have stronger business models, increasing market shares or having margin tailwinds etc. These are basically quality companies run by good managements and delivering consistent bottom-line growth, may be trading at slightly higher valuations. We are staying away from companies in sectors which are trading at apparently cheaper valuations but facing serious issues. We are of the view that, it is too early to take call on revival of such companies/ sectors.
5. According to you which sectors likely to outperform and underperform in calendar year 2016 and why?
In CY16, we think consumer discretionary sectors like automobile, building materials, retail & apparels would do well with more money in consumers' pocket from lower inflation and lower EMIs as well as better salary increments from 7th pay commission implementation. Even some of the consumer staple companies hold good promise as raw material price benefits continues. We are bullish on cement, road EPC and BOT, power T&D and defense related companies as well. Retail financiers should also outperform their peers who primarily lend to corporates as the stress level of corporates is not abating yet. Certain pharmaceuticals companies are also looking good with the US product pipeline launch perspective over next 3-4 years and price correction related to FDA related issues mostly behind. We continue to hold bearish view on PSU banks and commodity companies.
6. Which sectors are you avoiding at this point of time?
We are avoiding PSU banks as well as few private banks which are facing asset quality issues. We are also avoiding highly leveraged companies from metals and infrastructure sectors.
7. Mid-cap and small-cap stocks recorded a gain of 1 percent and 1.5 percent on year to date basis. Do you think, mid-cap and small-cap stocks will continue to perform better than their larger counterparts in 2016?
We believe mid and small-cap stocks would continue to outperform larger peers over medium to long-term time horizon. Primary reason being many of these larger peers are basically deal with commodities or facing growth or leverage challenges and many of them have made and continues to make wrong capital allocation. Wrong capital allocation and entering in to unrelated businesses is affecting growth, cash generation and RoE profile of these large-cap companies. So despite they are looking cheaper, we believe such companies would continue to underperform broader markets.
8. Favourable inflation has provided RBI room to lower interest rates by 125 basis points in 2015. Meanwhile, industrial production growth was positive with volatile movement in this year. In this light, how do you see outlook on growth, inflation and monetary policy in 2016?
Though RBI has lowered the rates, it has not been fully passed on to the borrowers yet. Weaker global growth as well as failed monsoons and delayed are also impacting India's exports and consumption growth respectively. Inflation number is getting benefitted because of lower commodities prices. Because of comfort on inflation and lower growth than expectations, there is scope of further easing on the monetary policy side.
9. Earnings performance remained lackluster for September quarter. Do you think India Inc. earnings will pick up in the next year?
Earning revival for India Inc. as a whole may not happen even next year also. Troubled sectors like corporate lenders, highly leveraged corporates, some of the infrastructure players may not show good results for some period. Companies from consumer discretionary sectors like auto, building materials, retail, retail lenders, road EPC/BOT players, power T&D companies etc. might show good growth. But we believe it is not appropriate to generalize the growth rate at market level, it will be better looked at stock level only.
10. What is your advice to investors at this point in time?
Now markets are looking fairly valued without not much expectations built in after one year of time correction and slight price correction too. Possible triggers lie ahead in terms of abatement of FII selling, policy direction post budget and passage of important bills in CY16 and 7 the pay commission implementation. As interest rates are drifting downwards, cost of capital is coming down for businesses, which is rather good for equities in general. So investors should remain invested in to the markets and continue investing through SIPs in this kind of markets.
Disclaimer: The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. Please consult your Financial/Investment Adviser before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund.
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