Ritesh Jain, CIO, Tata Asset Management, shares his views on the market outlook post the global turmoil.
How does it impact us?
- We see capital flows to India stalling till the global markets see signs of stability. We will have to wait for Fed rate hike to be priced in for that.
- The obvious vulnerable spots are commodity owners (and specifically metals) with bloated balance sheets and especially those with foreign debt. Lenders with bulge exposure to weak balance sheets will come under stress (Public sector banks and stressed privates).
- The equity market is more at risk of correction than the fixed income market because foreign ownership is quite high for Indian equities as compared to bonds (less than 2% of outstanding issuances).
For India, there are pockets of resilience and buffers have been built to weather crisis situations.
- Room for rate cut and all time high forex reserves.
- Weaker commodity prices augur well for net commodity importers like us - the fall in crude alone could give us a Rs 70,000-85,000 crore boost in 2015.
- The government is committed to fiscal discipline - the easing of commodity prices will help.
Although inflation has fallen sharply, inflationary expectations remain high and positive, indicating that India is witnessing dis-inflation, rather than deflation, which is a welcome development after years of high inflation. More importantly, we would argue that India is witnessing a period of 'good' dis-inflation. SBI CDS spreads, an important measure of credit opinion on India from a foreign investor's perspective, is still not showing any major signs of stress as compared to China and other emerging markets.
Nervousness entered markets when the dollar started rising against other currencies and rate hike fears started increasing; investors are anticipating a full blown flight to safety. Macro events in the last 6 months have led to a risk off event inducing massive volatility.
So what will it take to tame volatility?
I believe that some of these concerns are starting to get addressed with dollar retracing some of the gains made earlier which the market had already discounted possibly now pushing the Fed rate hike further away. What we need now is support from the lone central bank that can provide stimulus (China) to calm volatility.
Fixed Income: Where is India placed?
India to have more capital inflow (post initial volatility) as the only economy with some growth prospect, strong buffers and greater clarity.
Outlook on interest rates
- Low inflation to create room for easing – RBI target of 6% CPI by March 2016 to be undershot.
- Commodity prices to remain low – India to benefit on fiscal and current account side – supply side improvement can happen - RBI to have greater comfort.
- Global volatility impact on India to be limited – time wise and price wise – RBI to have greater comfort to ease policy.
- We expect RBI to cut rates on or before September policy review. Further rate cuts to happen in next calendar year.
- Yield curve expected to steepen with the belly of the curve outperforming the longer end.
- We expect 10 year G-sec yields to come to 7.25% to 7.35% by March 2016 (currently 7.78%).
- With credit off-take expected to remain muted, spreads on high credit quality corporate bonds expected to compress.
Our Recommendation: Look beyond the reality
- Invest in long duration – improving fundamental macros – global risk-off trade likely – greater clarity on cycle.
- Stay with high credit quality – global volatility to impact some weak credits; high quality spreads to compress in hunt for yields with safety.
- High duration funds likely to outperform – need to have 1 year + investment horizon, else short duration funds also a handsome proposition.
Equities
- The Indian market has come under heavy selling on account of global risk off but we believe that the correction provides investment opportunities.
- Earnings recovery in this cycle would be uneven and even within same sectors better earnings growth and good balance sheets would be rewarded by the markets despite seemingly higher valuations.
- While outflows from emerging markets and emerging market Asia funds continue; from a macro view, impact of China devaluation and commodity correction is not significant in India.
- We feel higher infrastructure spend by public sector, and urban consumption recovery due to lower inflation would be two factors going for India.
We are overweight on:
- Capex plays – cement, construction and capital goods and engineering.
- Urban consumption and input price reduction beneficiaries – Auto and auto ancillaries, paints and home improvement companies.
- Pharmaceuticals – strong base demand unaffected by global growth and INR beneficiary
We are underweight on:
- Marginally underweight Banking and IT and continue to be underweight PSU banks despite the recent rally.
- Very underweight global commodities, upstream oil and refining.
Our suggestion
While concerns are genuine, the fundamentals of Indian economy and markets are relatively better than other emerging markets. The current volatility has more to do with global risk aversion than with the health of our economy. Global markets are becoming increasingly integrated and risk is now spread easier than before. Having said that, we are better placed to weather a contagion with room for providing stimulus through rate cut, currency support through forex reserves and fiscal space opened by lower energy prices.
Hence, we believe that investors should climb the wall of worry and use the resultant volatility to their advantage by using SIPs for regular investments and investing larger amounts at lower levels of markets.
