Invest Through SIP

What is your take on the current investment climate of the country?

In the near term, the government is attempting to kick start the stalled projects by removing constraints related to resource mining, environmental and forest clearances. Cabinet Committee on Investments (CCI) is trying to expedite the processes and improve the ease of doing business in India. With revival in GDP, Indian corporate is expected to undertake capacity expansions (Brownfield and Greenfield) in the capacity constrained sectors. It may lead to revival of investment cycle in the economy. 

What is your outlook for the equity markets for this fiscal? 

With the sensex at 27000 levels, the market is quoting at 15 times earnings of FY16 and is closer to average valuations at which market had quoted in the last ten year period. Hence the upside in the market is limited in the near term. The market may undergo time correction in next 3-4 months and may rally further if the companies are able to deliver the positive earnings surprises in CY15.

What changes have you seen in the markets after the Budget? 
Post budget, the market is signalling on the potential risks to recovery in cyclical stocks. Barring the CNX infrastructure, the rest — capital goods, bankex and oil & gas — topped out in post elections period while the defensive sectors such as IT, Pharma, FMCG along with consumer discretionary sectors have performed very well in the market.

Which are the global cues that markets are looking forward for? 

Significant export growth is dependent on recovery in the global economy. Hence the pace of recovery in the US economy would be important from Indian market point of view. With asset purchase by FED ending in CY14, FED is expected to begin the interest rates tightening in second half of CY15. It may impact the foreign fund inflow into India for a short period of time. As the Europe is showing no signs of recovery, ECB may come out with QE probably by year end. From global liquidity perspective, QE by ECB would more than offset the end of asset purchase by FED. In such case, global liquidity environment may continue to remain supportive of equities.

What is your take on the interest rate front?

RBI is unlikely to cut interest rates in next six months as it sees upside risk to January 2016 inflation target of six per cent. Maintaining high interest rate differential may allow RBI to attract capital flows thereby strengthening its reserves position. Fear of rapid policy tightening by FED may lead to volatility in the capital flows. RBI hopes to rebuild its forex reserve to guard against the exchange rate volatility. With crude oil prices declining to less than $100/ barrel, fuel group inflation is expected to trend down in CY15. Hence RBI may look at cutting the interest rates in second half of CY15.

What is your take on the present valuations of the India markets?

With the sensex at 27000 levels, the market is quoting at 15 times earnings of FY16 and is closer to average valuations at which market had quoted in the last ten year period. In the past, we have observed that the higher earnings growth is accompanied by the above average market valuations and lower earnings growth is accompanied by the below average market valuations. As the earnings CAGR growth is expected to be 17-18 per cent during FY14-17, the market may quote at above average valuations during the period of high earnings growth.

What are the triggers that you are looking forward to with regard to the markets?

Lower inflation, lower interest rates, higher credit growth may act as trigger for the higher GDP growth which in turn would drive higher earnings growth for Indian corporate.

What are the sectors that you are currently betting on, and in which areas should investors take caution?

Improvement in consumer sentiments is likely to precede ahead of recovery of investment cycle. Hence consumer discretionary sector is likely to do well in the near term. From 2-3 year perspective, the NBFCs and Cement sector are looking attractive. In next 2-3 years, interest rates in the economy are expected to be significantly lower than the existing one. This may lead to lower cost of funds for NBFC which augers well for the loan growth. In cement sector, demand-supply gap is expected to narrow considerably with lower supply additions. It bodes well for the pricing power of cement sector. Investors should exercise their caution towards investment in FMCG sector as most of the stocks are quoting at a very high multiple and there has been no significant earnings upgrade in the recent past. 

What advice would you like to give retail investors at this juncture?

As equity assets class have far higher volatility compared to other asset classes, best way to even out such volatility is to invest through SIP (Systematic investment Plan). As the valuations are still at average levels and GDP growth has bottomed out, the equity markets are likely register reasonable returns in the medium term. In such case, investors are likely to earn handsome returns on the investment made through SIP.