Expertspeak. Corrections should be used as entry points

With the global markets tottering from the China sell-off and impending Fed-rate hike, the spotlight is back on emerging markets, especially India.

For the last decade and more, China has been a big purchaser of commodities of all kinds. A Chinese slowdown can be damaging, especially for commodity producing countries and regions. Some emerging markets like Brazil, Russia, South Africa, Indonesia and Turkey, already grappling with high current account deficits, may now be contending with lower commodity prices, which invariably could slow down their economies.

Advantage India India, by contrast, has a much lower current account deficit, projected to be around 1 per cent. Lower commodity prices, especially oil, provide room to lower input costs for Indian companies, and thus help boost macro savings. Inflation is low and under the RBI’s target rates.

The Chinese yuan’s depreciation and the rise in the dollar may play spoilsport with the Indian economy in the short run, but in the long run, India will get stronger.

Similarly, global markets can have a cascading effect on the Indian markets temporarily and any sell-off due to currency fears could see negative reactions on equities, but that should only make the Indian markets more attractive from a valuation perspective. India has immense purchasing power in the middle class. Besides, infrastructure development is being targeted by the government that could help boost the economy.

Opportunities The Indian corporate sector is still heavily leveraged, so it might be a while before India Inc starts to invest in capacity additions. But the good news is, demand in certain pockets like autos have been strong. Besides, India is in the beginning of a multi-year theme where savings will move into financial assets. Better returns from gold and real estate are unlikely as these assets tend to do well when there is high inflation and current account deficit. Also, real estate rental yields are so low that prices are unlikely to rise any further.

So, where are the opportunities? Based on what we have seen in the macros so far, investors should invest in fixed income instruments in an aggressive way. For companies to begin investing in capital expenditures, interest rate has to be lower. Hence, the Reserve Bank of India is more likely to reduce rates sooner or later. It makes us optimistic about debt funds, both in the short and long end of the curve.

Stock markets could see continued volatility, given the global market conditions. But investors should accumulate equity assets such as equity mutual funds in lumpsum, whenever possible, for the long haul.

Over the next five years, equity is expected to do very well. The Indian economy’s earnings pick-up will take a while, hence investors will have to play the waiting game. Earnings increase will be back-ended, which means that FY17 and FY18 are likely to clock better earnings growth.

Sector-wise, the outlook for private banks looks reasonably good. Metals, utilities and cyclicals are relatively undervalued as compared to mid-caps. Large-caps have some value too.

But don’t worry too much about corrections. They should serve as good entry points, and there’s a chance we could see more of these in the short run. Needless to remind you, the preferred way to make long-term wealth is to buy when the chips are down.

The writer is MD & CEO, ICICI Prudential AMC

COMMENT NOW