India growth story still intact, see a fair amount of global liquidity coming in: Sashi Krishnan, Birla Sun Life Insurance

In a chat with ET Now, Sashi Krishnan, Chief Investment Officer at Birla Sun Life Insurance, shares his views on the markets. Excerpts:

ET Now: The Indian markets are up 3 per cent in the last six days. That makes India the best performing market in the entire world. For the moment, we are at the top of the pyramid, but do you think this as good as it gets?

Sashi Krishnan: I do not have too many concerns at this point of time. Markets will continue to do well. There have been concerns around the geopolitical tensions across the world, but I feel that most investors believe that the risks are localised in all these geopolitical tensions.

All initial signs seem to suggest that your global liquidity will remain easy. The US Fed, in its recent statement, seemed to indicate that it will continue to maintain easy liquidity through 2014. Japan and Europe are continuing with their loose monetary policy. Even China is gearing around to an easy monetary policy. So long as global liquidity continues to be good, you will have money moving into equity markets across the world.

The India story at this point of time is fairly good. The political risks have come down significantly post elections and there is a lot more confidence in the fact that we have a government that will work. You are seeing improving macros, because if you see a large number of macro data that has come out in the last couple of days, things are showing an improving trend. All sectors - mining, manufacturing, electricity - are showing signs of improvement. Inflation came down significantly in June - so CPI inflation dropped from 8.4 to 7.4 per cent. Export numbers were very good. In fact, we had very strong export growth. Even on the import side, the non-oil, non-gold imports have gone up, signifying that there is some change happening in the investment cycle and that, it is improving.

As a destination, India still looks good. You will see a fair amount of global liquidity coming in and that is good news for Indian equity markets.

ET Now: What is the sense that you are getting about this big move in the markets that you are talking about? Would the rally be largely across the board or would the stocks be chasing earnings in growth momentum? Or do you think a bigger rally is what we are going to see in the broader markets and not as much in the front line stocks?

Sashi Krishnan: I would expect a broad market rally, with investors clearly concentrating on stocks where earnings visibility is a lot more certain. I would expect the cyclical rotation that we have seen into domestic cyclicals. The industrials will continue for some time, because there is a very strong momentum that people expect in this sector. Coupled with the fact that you will see a lot of momentum in the banking and the financial services space, what will not move so much possibly will be the defensives and some of those sectors that are exposed to the global commodity markets.

ET Now: For the moment, everyone is of the view that progressively things will only improve for the Indian economy. But our markets are ignoring the various problems and the sticky inflation?

Sashi Krishnan: If you look at the geopolitical risks that are rising out of events we are seeing in Ukraine, Iran, Iraq, global investors seem to be looking at them as localised risks. If you look at estimates for global growth, I do not think those estimates have changed very significantly. People still expect 2014-2015 to see a 3 to 3.5 per cent global growth. I do not think markets are getting too concerned about that.

Coming to specifics as far as India is concerned, two of the big worries are oil prices which could move up, especially given tensions in the gulf region and in Ukraine and Russia. Second, the fact that we had a bad start to the monsoon and there were worries that food inflation would pick up, that could impact domestic consumption and therefore markets could react negatively.

On both those accounts, a lot of those fears have receded somewhat over the last couple of days. For example, oil prices have not moved up significantly to, say, 120 a barrel, as many people expected. Secondly, with the monsoon picking up, fears around it have also started receding. Thus, the markets are taking a rational view and saying that things will not get as bad as was thought earlier.

ET Now: Telecom has been an underperformer, but if Idea numbers are anything to go by, it looks like that sector is finally turning around. What do you think?

Sashi Krishnan: Yes. A lot of the movement that you are seeing today possibly is because of those spectrum sharing guidelines that came out.

There are two points to note here. One, hopefully we will have better spectral efficiency - the quality and reach of the network will improve significantly for many of the incumbent players. The incumbent players tend to benefit quite a bit with these new guidelines. Hopefully the TRAI guidelines get accepted by the department of telecom. These players are now moving into a new paradigm, and possibly the telecom stocks will see some kind of momentum from now on.

ET Now: What is the view on oil and gas? Most of these names, Reliance Industries in particular, are reacting to its earnings.

Sashi Krishnan: Yes and the primary reason is because the expectation is that this sector will see a fairly large amount of reforms. We have not seen much happening till now in this sector and even the Budget did disappoint a bit as far as the oil and gas sector was concerned, because one of the big expectations was that we would move into a more rational subsidy regime and possibly subsidies would get removed and we will go into a free pricing regime.

But the expectation very clearly is that outside the Budget, over the next couple of months, this is a sector which will see a significant amount of reforms and if that happens, many of these people will be able to improve profitability significantly. That is one of the reasons you are seeing momentum.

ET Now: Do you think the spring time for the pharma industry is over? The base effect has kicked in and domestically, the government is committed to bring the drug prices down.

Sashi Krishnan: I firmly believe that though the consumption cycle has slowed down a bit, urban consumption will start picking up especially as the job creation starts in the economy. With so much of disposable income put back in the hands of the domestic consumer, the urban consumption will pick up and that is going to be a big plus to many of the pharmaceutical companies that are targeting the domestic markets.

As far as the global markets are concerned, the Indian pharmaceutical sector has always been well positioned and continues to be well positioned. We’ll be able to take advantage of the fact that growth is returning to most of Europe and the US, which is only going to be good news for them.

ET Now: What is the sense you are getting on railway stocks? FDI on rail is expected to get through this week itself. Could it be a game changer for the industry as well as railway stocks?

Sashi Krishnan: A couple of things out there – Firstly, we will see the freight corridor moving very quickly in the next couple of months on both the north-west and the north-east corridors and that will in itself create a huge amount of demand for a lot of material that goes into building railways.

Coupled with the fact that the railways is looking to get a lot more efficient, the demand for rolling stocks will keep moving up. Also, the fact that FDI in this sector may be opened out over the next couple of months is what is creating excitement out here. But that is one area the new government will concentrate on because moving up railway freight and investments in the railway sector can boost growth in the economy.

ET Now: Ultimately, markets are a function of earnings. To your mind, from a two to three-year basis, where do you think the big earning surprise would come in from?

Sashi Krishnan: The earning surprises will come in from the domestic cyclicals and the industrials. If you look at earnings in this particular sector, they are stagnated in the region of a CAGR of 9 to 12 per cent over the last many years. You will see earnings growth moving up in this sector from its current l1-12 per cent to something like 16-18 per cent and that is where the big delta will come in this market.

Thus, if you look at the BSE Sensex earnings at something like Rs 1300, a 16 per cent CAGR can take the earnings up to something like Rs 1700-1800, which means that there can be fairly sustainable momentum in equity markets over the next two years or so, as earnings pick up specifically in domestic cyclicals and industrials.