INTERVIEW. ‘Fresh upgrade cycle to start for specific sectors’

With Indian markets wobbling again after a fantastic run since March, Prashant Sharma, Chief Investment Officer of Aviva Life Insurance, expects equities to witness volatility in the short-term due to earnings downgrades and global growth concerns.

He expects the scenario to change over the course of the year and a fresh upgrade cycle to start for specific sectors. And, hence, according to him equities are expected to perform well in the second half of FY17.

Sector-wise, Sharma remains bullish on domestic demand stories like infrastructure, cement, consumer and related sectors while he is cautious on global themes like information technology, metals and pharmaceuticals. Below are the edited excerpts of the interview:

What is your take on the results season so far?

We would term it broadly in line with expectations. Sectors like IT has been below consensus expectations while cement and automobiles have delivered better than market expectations.

Which are the sectors that could surprise positively and negatively?

There may be a few positive surprises emanating in the cement, consumer discretionary and downstream oil space. Banks may also report better numbers than December quarter but this would be partly because of the reduced stress account list by Reserve Bank of India.

On a medium term basis, pharmaceuticals sector has potential for material negative surprises in terms of earnings downgrades due to compliance concerns and increasing competitive intensity. Current valuations are not fully pricing in these risks and could see some time-wise or price-wise correction.

Do you think March quarter would form a base for a corporate recovery?

Though we believe that economic fundamentals have been improving on an overall basis, we still think earnings downgrade cycle may continue for another quarter or two. We expect this scenario to change over the course of the year and a fresh upgrade cycle to start for specific sectors.

What do you think of India market valuation compared to emerging market peers?

Valuations are still close to historical averages. Indian markets have always traded at a premium to most EM peers and we believe this shall continue in future as well.

What is your investment strategy in terms of market cap and sectors? Why?

We are generally market cap agnostic. Sector-wise, we remain bullish on domestic demand stories like infrastructure, cement, consumer and related sectors. We are concerned about growth in international markets and continue to be cautious on global themes like information technology, metals and pharmaceuticals.

Has your strategy changed in the last six months or after the Budget/RBI policy?

In general, things have started improving on the margin over the last few months. For instance, we are incrementally more positive on banks and rate sensitive sectors post RBI policy. We believe markets have not fully appreciated the positive impact of measures taken by the RBI to improve liquidity and effective rate cuts.

The Union Budget reassured the markets about fiscal discipline being followed by the current government which was a big relief for investors in general. It also reiterated the government’s focus on infrastructure and skill development, albeit with a greater rural flavor.

What are the positive and negative triggers in 2016?

Positive triggers would be good monsoon, likely earnings upgrade in H2, improvement in the asset quality of banking system. Negative triggers could be further run-up in commodity prices (especially oil), global slowdown fears, unexpected currency moves and resultant risk aversion.

Your comment on the impact of RBI’s move to remove 20 companies from the NPA list

We were not too excited about the move as it creates even more confusion among investor community. Moreover, from what we understand from our discussion with banks and other market experts, the provisioning requirements were also not uniform across all banks.

Do you think selling by domestic institutional investors since March is because of the redemption pressure or profit booking by investors? What is the role of insurance players as data is not available?

We would attribute the DII figures to mostly profit-booking as they were significant buyers in January & February when markets were trading at lows and foreign institutional investors were continuous sellers. For insurance players, March quarter is typically significant in terms of overall inflows and hence most insurance companies may have been net buyers.

Do you see FIIs continuing to coming back to EM and especially India? Why?

Emerging market economies provide FIIs attractive yield and growth opportunities. Within the EM space, India remains a structural growth story with a strong central bank and responsible government. Therefore, as long as overall global EM fundamentals do not change drastically, FIIs would continue to invest in EM markets, especially India. Episodes of risk aversion are short-term in nature and do not alter the overall long term story.

Are you hopeful of the agencies’ monsoon forecast?

We consider these monsoon forecasts as they evolve over the course of the season, along with inputs of certain international weather monitoring organisations. Most importantly, spatial distribution of seasonal rainfall is also critical in terms of fortunes of the overall agriculture sector. Monsoon is crucial for the economy this year as another poor year could lead to significant distress in the rural economy

Are you keeping an eye on oil prices amid the talks of freezing output?

Oil prices have risen sharply from the lows partly because of these talks and partly due to the weakness in US dollar and a corresponding risk-on environment in various asset markets globally. We believe it would be difficult for oil producers to arrive at an agreement to freeze output levels and implement it for a sustainable period of time especially when demand-supply metrics are undergoing a structural change.

Between cyclicals and defensives, what would be the ideal ratio on an overall basis? Why?

This ratio depends on the overall view on markets and business cycle. In a weak market, defensives tend to outperform and vice-versa. In the current scenario, post the sharp run-up in prices post Budget, it may be prudent to be slightly cautious.

What will be your allocation between debt and equity in FY17? What has been the same in FY16? If there is going to be any change then why?

It’s difficult to discuss allocation strategies at this stage since asset allocation is a function of various factors including flows, view on the market etc.

Benign inflation, prediction of normal monsoon and the Government’s commitment to fiscal discipline augurs well for continued accommodative monetary policy stance. This should result in another good year for debt markets.

Equities are likely to witness volatility in the short-term due to earnings downgrades and global growth concerns, but are expected to perform well in the second half.

It will be two years for the Modi government? What according to you are the positives and negatives so far?

Greatest positive has been the focus on improving infrastructure, skill and efficiency. While the Government has taken a few bold steps on the reforms front, markets would have been more satisfied if a few key pending reforms measures are also pushed through in a timely fashion. Further, it would be a good idea to improve communication on the various positive measures that have already been implemented.

What is your take on the move by US Federal Reserve?

We think the US Fed is behind the curve in normalising rates. The longer they delay, it becomes more confusing for the markets and may result in higher volatility over time.

COMMENT NOW