We are Tied to Cement, Oil, Auto & Infra Themes
Market mood may swing quite wildly from euphoria to depression, but fundamentals like earnings are essentials for investing said Bharti AXA Life’s chief investment officer Sandeep Nanda. In an interview to Shilpy Sinha, he explained his choices and how he is prepared to avoid obstacles ahead. Edited excerpts:
Corporate earnings have been one of the drags for the market. How do you look at it? There are several signs of incipient cyclical recovery in domestic economic indicators such as power generation, cement and petroleum product demand growth. However, a broad based earnings recovery will take time and will also depend on how the global economy pans out. To see equity market returns, we have to see earnings come back. Wherever we see there is visible growth, we are focusing on those sectors. While overall market valuations at this point are fair, there are pockets of bottom up attractive valuation in stocks and sectors with visible growth.
Where do you see value? It includes oil and gas sector, cement, consumer discretionary sectors such as autos, durables and retail financial services. The oil and gas sector is benefiting from strong demand and government policy reform while cement is benefiting from public spending-linked de- mand. Commercial vehicles are doing well and is an area of growth but we have to be selective. There will be more focus on consumer discretionary. It is going to benefit from lower inflation and lower interest rates. Also defence pensions have been increased and central government employees get their wage hike later this year, which will be a positive for discretionary. There is lot more infrastructure spending on roads and irrigation. So, we are tied to these themes as well. Therefore, our investment positioning at this point is driven by visible earnings growth and a bit of more thematic investment where we can hope to generate returns. Which are the areas that you are not comfortable with? Some of it could be where valuations are expensive. We would rather not be overweight consumer staples like soaps, detergent and food material, especially if a cyclical recovery broadens and gets stronger. In capital goods spending, there are only pockets of growth where the government is spending. We are not going to see wide spread private corporate spending soon. Companies are taking time to go through the balance sheet deleveraging process. We are thus looking to invest in companies that are into roads, railways and public sector refineries, but not other capital goods sectors. Software services sector also has issues related to pricing and changes in the business model itself and slowdown in several verticals. We are also underweight on telecom. There is more competition coming in. Technology is causing lot of upheavals. Telecom policy is changing. It’s a bit tricky to invest in telecom.
What are the other variables that an investor has to keep an eye on? There are a lot of variables. On the positive side if monsoon is okay, RBI will be confident that inflation will be under control. A normal monsoon would definitely address the rural distress we are seeing and boost rural spending. We need to closely watch domestic economic indicators to see if the recent cyclical recovery continues. Among the known unknowns, the so called Brexit issue will be extremely important in the run up to the June referendum in Britain. Any policy shocks from the US Fed or China can also easily create panic in emerging markets.
After the Budget we saw FIIs coming back to India. How do you see their behaviour for the year? Over the last two months, we have seen FIIs coming back to India. (It was) a positive budget in which the government demonstrated fiscal discipline and global concerns easing coincided, after which FII flows turned positive on India. Foreign investors had been withdrawing money from emerging markets (EMs) for several weeks. The trend was DM over EM. However, once the dollar started to weaken the positioning reversed. If people think there is no growth in EMs and that dollar is going to strengthen, then DM will be preferred over EM. There could again be a flight of money from emerging markets. A lot of sovereign funds have investments in India and other EMs. They could also be facing pressure to take money out. These are the risks could re-ignite concerns.