'We believe the Indian stock markets are in a structural bull run, there can be bouts of volatility.'
Indian corporate earnings are showing early signs of bouncing back. They should gain momentum in FY18 and FY19, says Ravi Gopalakrishnan, head, equities, Canara Robeco Mutual Fund, that calls itself the second oldest Indian mutual fund.
In an interview to Ashley Coutinho, he talks about demonetisation’s impact on earnings growth, foreign portfolio investor flows, the threat of protectionism, among other issues:
What is your outlook for the market?
Indian equities are showing a bit of resilience on the back of improving macroeconomic fundamentals, expectation of lower interest rates and the structural reforms being implemented by the government.
Corporate earnings are showing initial signs of recovery and are expected to gather momentum in FY18 and FY19. While we believe the Indian stock markets are in a structural bull run, there can be bouts of volatility.
The policies of the new government in the US could potentially impact Indian exports. Similarly, the risk of US interest rates going up could impact emerging market flows.
What are the global cues to watch for in 2017?
A relatively new, but potentially negative trend, is a nativist political environment that is reviving protectionism, reversing over a half-century of global trade integration. It has been the latest trend in 2016 and 2017.
The EU continues to face a number of real and perceived headwinds -- financial and political. While domestically-oriented data, especially those tracking consumer spending, still point to a recovery, industry and trade-related signposts show sharp declines.
Brexit might remain an issue for the EU. Elections in France and Germany might have to deal with a resurgence in isolationist anti-immigration rightwing political parties.
In the emerging market space, the direction of the Chinese economy will continue to be a focal point. Recent economic statistics show China’s economy picked up a bit of steam, boosted by government infrastructure spending and property sales.
What is your outlook for foreign portfolio investors investments?
We are dependent on FPI (foreign portfolio investors) flows to a large extent, though the impact is getting a bit muted, given the strong domestic flows. While there has been volatility over the past few months, the markets have been trading in a broad range since January 2016.
FPIs withdrew funds in the last quarter of 2016 owing to uncertainty surrounding the US election, US Fed increasing interest rates, and uncertainty around the globe.
Domestically, the macro economic variables of our country have been robust and no negative surprises in the Union Budget 2017-18 helped India being a preferred investment destination in the emerging market space. The recent turnaround in sentiment in the Indian equity market could also be attributed to Q3FY17 corporate earnings, which have indicated that the impact of demonetisation was limited.
Going forward, structural improvements and reforms, implementation of GST, corporate earnings growth, may determine the amount of investments FPIs make in our markets.
How do you see the year for emerging markets?
Emerging markets started 2016 on a weak note troubled by concerns surrounding China’s economy and uncertainty around global commodities.
As the year progressed, positive factors, such as improving commodity prices and economic stability, led to emerging-market strength. As a result, emerging markets were among the top performing markets in 2016.
The economic condition of major advanced economies still looks weak except the US. Political uncertainty in the Euro zone, disinflationary environment in Japan could keep the developed economies in check.
The “hunt for yield” has been a frequently used term in recent years. With low and negative yields on many government bonds globally, we continue to expect investors to look toward emerging-market equities, given the income prospects available.
What are your estimates for corporate earnings for FY18 and FY19?
The Indian economy is slowly recovering and we expect the earnings cycle to recover in FY18.
The demonetisation of the currency has impacted the FY 17 earnings to some extent, but this is likely to be temporary.
We also expect some disruptions around the time when GST is likely to be implemented in the first half of FY18.
We expect earnings to recover at a much faster pace during the second half of FY18. We expect FY18 earnings to grow at 12-14 per cent and FY19 growth to be around 18-20 per cent.
What is your advice to investors at this point?
In the short term, the impact of demonetisation on the Indian economy is likely to be limited.
The long- term opportunities presented by the demonetisation exercise may not only help improve the quality and quantity of our GDP growth, but also improve fiscal health of the government balance sheet.
The implementation of GST this year should also help the companies in the organised sector as the companies in the unorganised sector would lose the cost advantage due to tax avoidance. With positive macros and interest rates expected to decline further, the long-term potential of Indian economy remains intact, despite the near-term challenges.
We continue to be constructive on equities and see merit in increasing allocation to the asset class in a staggered manner to even out market volatility.