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Expert Corner: Fund Manager’s View on Indian Equities
Mr. Mahesh Patil
Co-Chief Investment Officer at
Birla Sun Life Mutual Fund
New Year ushers new
expectations - let's see what
Mr Mahesh Patil, Co-Chief
Investment Officer at Birla Sun
Life Mutual Fund expects for
equity markets in the coming year
as he speaks to Arihant Research
Team.
Arihant: How was the year 2016 for
Indian equity markets?
Mahesh Patil: 2016 was a phenomenal year! would have to build political equity for
More things happened that never happened
before.
Brexit and Trump triumph were low
probability outcomes until the voting
day. The results gave voice to the
powerful majority that was unheard
before. The central banks of ECB and
Japan set policy rates below zero which
took over a third of the developed
bonds to sub-zero levels. The fall in oil watched.
prices prompted the OPEC and other oil
producing nations to collectively agree
on production cuts for the first time in
eight years.
Closer home, a decade old effort to
simplify indirect taxes found absolute
consensus among all political parties to
pass the GST bill. The government was
bold enough to get the long standing
bills like Real Estate (Regulation &
Development) and Insolvency and
Bankruptcy bills passed. It was bolder
enough, in its continued effort to fight
black money, to demonetize 86% of
the currency in circulation – which no
country in the world did in the past.
Arihant: What are your expectations
from the global markets?
Mahesh Patil: Trump has three main
agenda items – to cut corporate taxes
from the current level of 35% to 15%; to
spend USD 1 trillion on infrastructure
and to facilitate companies to repatriate
capital from abroad. As these measures
are US growth positive, the dollar index
rallied to breach the 100 mark decisively, not impacted. 53% of companies in
the 10 year US treasury pulled back 75
bps to breach the yield of 2.5% which
was tested earlier and the US equity
indices have been touching new lifetime
highs. The reality could be entirely
different from expectations as Trump
all the three agenda items.
China could continue to support
investments in the economy through the
quasi fiscal stimulus as it did last year. operations. Though we see impact
The weaker currency (depreciated 12%
in 17 months), would help in exports.
The soft landing is a work in progress
for China. The comments and actions
of Trump on China have to be closely
Eurozone will have a politically
heavy year with a possibility that far
right parties could win in France and
Netherlands. As these parties initiate
process to exit Eurozone and European
Monetary Union, markets could correct
globally. Since this would be a multiyear
process, markets could overcome the
uncertainty.
We expect the brent crude to trade in the
band of 55-65 USD/bbl as it is difficult
to enforce production cuts and shale gas
production becomes viable at the lower
end of the price band.
World economic growth looks good
with a strong US, a stable China and a
stimulating Japan. The outflows from
EM markets may continue in the near
term due to strong USD. As valuations
become attractive, the flows into EMs
would reverse.
Arihant: Coming back to India, how do
you think demonetisation has impacted
our country? What are the expectations
from Indian equity markets in the New
Year?
Mahesh Patil: Due to demonetization
consumption has taken a setback for
next 2-3 quarters impacting GDP to the
tune of 100-150 bps in H2-FY17. Based
on dependence on cash transactions
and operating leverage, different
sectors would be impacted in varying
proportions. Some export oriented
sectors or the ones in B2B segment
are not affected at all. Just to quantify,
among the Nifty companies, 43% (by
weight) of companies in sectors like
IT, Pharma, Oil &Gas and Power are
FMCG, Auto, and Financials etc. may
be impacted for less than two quarters.
Only 4% of companies in Cement and
Paints may see an impact for more than
two quarters.
Following the effect of Demonetization
will be the implementation of GST.
The businesses have to further readjust
to the new indirect regime resulting
in destocking and change in current
on growth in the short term, both
demonetization and GST are immensely
beneficial in the long run. The tax net
would widen, tax compliance would
improve, more banking services would
be accessed and more businesses move
into organized segment.
Development is not only an economic
necessity but also a political one.
Elections now-a-days are won and lost
based on development. As government
is aware of it and it is also aware that
there has been a setback in the near
term, it is imperative for it to prop it
up. Cutting direct taxes, subsidized
housing, rural development and
building infrastructure could be the key
focus areas for the government.
In the next two to three quarters, macro
data and companies’ results could be
volatile. However, as things stabilize
in H2-FY18, earnings could recover.
We expect the earnings of Nifty
companies to grow at 19% in FY18 led
by financials and autos.
The year 2017 will see lower bond
yields and fixed deposit rates. It will
see falling real estate and gold prices.
It is equities that are providing a good
alternative for investment with a
medium term horizon. The valuations
are reasonable and the base for
sustained earnings growth is being set
up.
6 ARIHANT CAPITAL ¡ JANUARY 2017