While the macroeconomic fundamentals of economy have improved dramatically over the last three years, the government of the day needs to take utmost care and caution and keep in mind that incremental delays in resolution of NPA problem would delay private capex recovery and also while there are reasons to be positive about the long-term prospects of GST, it’s important that it gets implemented in an orderly manner with less disturbances to the trade, said Harshad Borawake, head of research (equity) at Mirae Asset Global Investments, a leading independent asset management firm in Asia with a worldwide AUM (asset under management) of $100 billion, in an interview with Ritwik Mukherjee. Fiscal prudence of states will be an area that will be keenly watched by the market, he said and added the good thing is FIIs and DIIs are expected to be positively inclined towards India. Excerpts:
The Modi government has completed three years. What would be its expectations for the remaining two years of the government?
I would like to highlight some of the key initiatives of the Modi government, which have had and will have positive impacts on the economy and the capital market. The NDA government’s policy initiatives on many fronts, which include focus on infrastructure creation, fiscal prudence, containment of inflation, stability of exchange rates, sectoral reforms (deregulation of auto fuels, power and coal sector reforms) and passage of GST bill, are good for the economy. Also, its efforts to resolve non-performing assets (NPA) issue, curb black money, financial inclusion, promoting ‘make in India’ and green energy along with building external relationships are encouraging steps.
The good thing is most of these measures will continue to get implemented over the next few years. We believe these measures are structural in nature and economy will reap benefits not only over the next two years, but also over many years to come.
Over the next two years, we expect to see more action towards disinvestment of ailing public sector undertakings (PSUs), building of smart cities, improvement in digital connectivity, the Sagarmala project and inland waterways.
The market follows the improvement in earnings of companies and all these policy measures will help improve the earnings trajectory.
What are your main concerns about the market at this point of time?
As far as the risk is concerned, on the cyclical side, monsoon is going to be an important factor. However, the government has been taking adequate measure to reduce volatility in the farm income and hence, rural demand growth should sustain.
Second, incremental delays in resolution of the NPA problem would delay private capex recovery in the economy.
Third, though we are positive from the long-term prospects of GST, it is important that it gets implemented in an orderly manner with fewer disturbances to the trade.
And finally, fiscal prudence of the states will be an area that will be keenly watched by the market.
What’s your take on the fundamentals of the economy and the capital market?
The macroeconomic fundamentals of economy have improved dramatically over the last three years. This has led to softening of yields and reduction in market risk premium.
The market has adequately responded with the improving economic fundamentals and increase in risk appetite. We are positively inclined, both on the economy and the market from the next 3-5 year perspective.
How should the investors handle their investments for near future & what would you say to retail investors at this juncture?
For individual investors, for their equity exposure, SIP is the best option as timing the market will be difficult. Case in point is the period post-demonetisation, when the market had gone down, I suspect not many individual investors would have been able to time such instances.
We would advise investors to hold on to their existing equity exposure, and invest in a disciplined way, but within the earmarked asset allocation towards equities.
Which sectors investors should focus on in the current scenario?
As high as 60 per cent of the Indian economy comes from consumption and is growing at a faster rate compared with other sectors. So the consumption focused companies should do better than others.
But investment decisions are not made on such broad metrics but on in-depth research based on earnings growth potential of companies, return ratios, size of the opportunity, competitive analysis, pricing power, valuation, management quality and many more.
Hence, sectors like financials, automobile and consumption-driven sectors should do well. We are cautious on IT and Telecom.
How are institutions/FIIs looking at India? Do you think this outlook will continue for some time?
Foreign institutional investors (FII) and domestic institutional investor (DII) inflows have been positive for CY15 and CY16 and more so in CY17 till date. Net equity buying by FIIs during this period is Rs 90,000 crore, while DIIs net buying has been around Rs 1,20,000 crore. This explains the current outlook of DIIs and FIIs. As the fundamentals of the economy are improving, institutions will be positively inclined.
Now that GST rates have been fixed, what impact would you expect on the capital market?
As far as the organised part of the economy is concerned, we believe it will benefit with the formalisation of the economy and streamlining of the movement of goods and services. Capital markets will reward companies, which will be able to take advantage of this structural and major shift in the economy.