The Centre has achieved a lot in the last two years in terms of setting the economy right. With these changes, India can attract a lot of foreign investments, especially as China is now slowing down, says Ravi Gopalakrishnan, Head Equities, Canara Robeco Asset Management Company. Excerpts from an interview with BusinessLine :

Post-Budget the market has rallied. Do you think this is sustainable?

There were a few negative expectations around the Budget, such as the possibility of re-introducing long-term capital gains tax on equity or increasing the holding period from one to three years as in the case of debt investments. Fortunately, none of those came in. So, the market was really focussed on the fiscal deficit number and the Budget actually delivered on that. Also, the Budget laid down plans to increase capital expenditure in infrastructure and railways.

It also gave the much-needed push to agriculture. This may give a boost to rural consumption. Further, the Budget was perceived as non-inflationary, which paved the way for rate cuts by the RBI. Foreign investors, who had also been selling owing to concerns arising out of China and possible rate hikes by the US Fed, found respite from the Fed’s change in stance.

But hasn’t the quality of spending suffered with a tight fiscal policy?

From the capex side, the government has increased budgetary allocation to roads and railways. The Centre was constrained owing to the implementation of the Seventh Pay Commission, which will increase expenditure. The key positive, though, is that the Budget was consistent, and there is a clear direction laid down by the government on where it is headed in terms of reforms.

The reforms in the 1990s were far easier to implement, given that most of the decisions had very little political implications. But now, the reforms undertaken by the government are much more challenging. Further, in order to attract foreign investors, the government has to ensure a stable currency environment and consistency in taxation policies.

With these changes, doing business in India becomes a lot easier and transparent. So, India can attract a lot of foreign investments, especially as China is now slowing down. This government has achieved a lot in the last two years in terms of setting the economy right.

So, at what rate do you think our economy can grow?

Our economy is still struggling to stabilise and the headline growth number of 7.6 per cent does not reflect what is actually happening on the ground. But when the economy is going through a lot of structural changes, growth, especially in the banking sector, is bound to be slow.

But all this will change as and when the capex cycle starts reviving. In fact, some sectors, such as defence, railways and roads are already witnessing a turnaround.

Essentially, corporate earnings should turn around slowly in the second half of FY17. The following years — FY18 and FY19 — will be big years in terms of corporate earnings growth.

What is the market factoring in at this point in time?

Market is already discounting FY18 earnings. If we assume a 15-18 per cent growth (over FY17), then valuations are reasonable, though not cheap, considering the sharp rally, post-Budget. So we are in the value zone, where from a three- to five-year perspective, a lot of stocks look attractive. While some are priced to perfection, there are pockets of attractive opportunities across sectors and market caps. Which themes are you betting on?

We are expecting an economic recovery largely led by infrastructure. But we are not betting on asset owners, as many of them are still plagued by overcapacity and high debt. We are looking at the related space, instead, such as road construction where the competitive intensity has come down, defence, power transmission and railways. Similarly, consumer discretionary, is another theme we are positive about.

Added to this, if there is a normal monsoon, then rural demand should also pick up, which augurs well for two-wheelers, and heavy commercial vehicles, among others.

Your Equity Diversified Fund has delivered below-category-average returns. Why?

We expected an early economic recovery which has now been pushed back by six to nine months. We took some early bets on industrials and banking that is taking time to play out.

But we have made some changes to our portfolio, based on our view of FY17 earnings.

Related Topics
comment COMMENT NOW