ET NowIn a chat with ET Now, Sashi Krishnan, CIO at Birla Sun Life Insurance, shares his thoughts on the market. Excerpt:
ET Now: How are you reading the market mood right now, given the 12-year decline we have seen in crude prices, the murmur from China and the looming fear of a possible Fed rate hike by about 100 bps this year?
Sashi Krishnan: Markets are currently reacting to both global headwinds, low expectations for this earnings season and the fact that commodity prices are still easing a bit, especially with crude hitting its low after a many years. If you look at the global headwinds, you cannot under-emphasise the fact that the problems that China is going through - one in terms of capital outflows, two in terms of currency depreciation and three in terms of equity markets sell off - will have its ripple effects on emerging markets and if does not stabilise soon, you could have capital outflows from other emerging markets also and we see that happening in India. Also, if you look at earnings expectation, there is not much expectation for Q3 earnings. You should see flat earnings growth, revenue growth marginally at 1% to 3% and not improvement in margins. Markets are factoring in all that and corrected quite significantly.
ET Now: Are we looking at a phase where we could see significant downside from what we are already at? Do you think the broader markets would play catch up with the frontline indices at some point or would you say that large part of the fall is behind us?
Sashi Krishnan: I would tend to believe that the large part of the fall is behind us, even if Nifty may still fall to 7200. I strongly believe that India 2016 will be a year of a cyclical recovery and I see this recovery driven by three things. One is that you will see public spending in investments pick up quite significantly. Obviously we will have to watch the budget very carefully for that because we have almost seen a 60% increase in planned capital expenditure in the first eight-nine months of the last year if we can find the resources to push this public expenditure into infrastructure and investments. I would see that private capital expenditure would also start picking up from 2016 onwards.
Secondly, private consumption will also start picking up in 2016. From 2014 onwards, we have seen urban consumption picking up. Retail consumption has dropped very significantly. It is bottomed out and if 2016 is a good monsoon year, I do think retail consumption will also start picking up and that will be the second big cyclical trigger.
The third trigger will be the fact that there were great expectations of structural reforms which did not happen but there were a significant amount of administrative reforms that happened during 2014 and 2015, and 2016 will be the year where structural reforms will get pushed. Therefore, I would not be too worried about markets correcting significantly.
ET Now: It may just be a little early but what has supported the market this year amidst all that volatility? The mutual fund money and the SIP money which has poured in has really been the silver lining in the clouds. Are you getting any queries about redemptions or is it too soon to talk about that?
Sashi Krishnan: If you look at domestic retail investors, they have participated in a big way in equity markets this year. Mutual fund and insurance investors have put in over a lakh crore rupees into equity this year and a significantly larger amount into debt also in debt mutual funds and debt ULIP funds this year. Retail investors do tend to get a little unnerved when there is uncertainty in the markets. But they have now realised what the big problems they had always had are in terms of timing the market is behind them because markets have corrected so significantly. There is a huge movement away from physical assets into financial assets in the last one and a half years and that trend is going to continue. My own feel is that you will see continued flows into both mutual funds and insurance funds through 2016 and that will be a fairly large support to equity markets.
ET Now: What does one make of the kind of selling pressure one has seen? Do you think that when it comes to 2016 as well, they are going to remain on tenterhooks and continue to sell?
Sashi Krishnan: 2015 has been a year when foreign institution investors sold quite heavily into the markets and I would presume rightly so because they did expect a fair amount of depreciation in currencies across the world. I have not seen over the last couple of years two continuous years where FIIs actually have had negative flows into equity markets and therefore when some stability returns to global markets, that stability could possibly return when we see issues in China getting sorted out and possibly when the dollar strengthening pauses. So at that point of time, I do think that foreign investors will start getting back into emerging markets. But maybe for the next couple of months, you may see continued selling by foreign institutional investors from emerging markets including India. But I strongly feel that foreign institutional investors will return once a lot of these global instability gets sorted out.
ET Now: How are you reading the market mood right now, given the 12-year decline we have seen in crude prices, the murmur from China and the looming fear of a possible Fed rate hike by about 100 bps this year?
Sashi Krishnan: Markets are currently reacting to both global headwinds, low expectations for this earnings season and the fact that commodity prices are still easing a bit, especially with crude hitting its low after a many years. If you look at the global headwinds, you cannot under-emphasise the fact that the problems that China is going through - one in terms of capital outflows, two in terms of currency depreciation and three in terms of equity markets sell off - will have its ripple effects on emerging markets and if does not stabilise soon, you could have capital outflows from other emerging markets also and we see that happening in India. Also, if you look at earnings expectation, there is not much expectation for Q3 earnings. You should see flat earnings growth, revenue growth marginally at 1% to 3% and not improvement in margins. Markets are factoring in all that and corrected quite significantly.
ET Now: Are we looking at a phase where we could see significant downside from what we are already at? Do you think the broader markets would play catch up with the frontline indices at some point or would you say that large part of the fall is behind us?
Sashi Krishnan: I would tend to believe that the large part of the fall is behind us, even if Nifty may still fall to 7200. I strongly believe that India 2016 will be a year of a cyclical recovery and I see this recovery driven by three things. One is that you will see public spending in investments pick up quite significantly. Obviously we will have to watch the budget very carefully for that because we have almost seen a 60% increase in planned capital expenditure in the first eight-nine months of the last year if we can find the resources to push this public expenditure into infrastructure and investments. I would see that private capital expenditure would also start picking up from 2016 onwards.
Secondly, private consumption will also start picking up in 2016. From 2014 onwards, we have seen urban consumption picking up. Retail consumption has dropped very significantly. It is bottomed out and if 2016 is a good monsoon year, I do think retail consumption will also start picking up and that will be the second big cyclical trigger.
The third trigger will be the fact that there were great expectations of structural reforms which did not happen but there were a significant amount of administrative reforms that happened during 2014 and 2015, and 2016 will be the year where structural reforms will get pushed. Therefore, I would not be too worried about markets correcting significantly.
ET Now: It may just be a little early but what has supported the market this year amidst all that volatility? The mutual fund money and the SIP money which has poured in has really been the silver lining in the clouds. Are you getting any queries about redemptions or is it too soon to talk about that?
Sashi Krishnan: If you look at domestic retail investors, they have participated in a big way in equity markets this year. Mutual fund and insurance investors have put in over a lakh crore rupees into equity this year and a significantly larger amount into debt also in debt mutual funds and debt ULIP funds this year. Retail investors do tend to get a little unnerved when there is uncertainty in the markets. But they have now realised what the big problems they had always had are in terms of timing the market is behind them because markets have corrected so significantly. There is a huge movement away from physical assets into financial assets in the last one and a half years and that trend is going to continue. My own feel is that you will see continued flows into both mutual funds and insurance funds through 2016 and that will be a fairly large support to equity markets.
ET Now: What does one make of the kind of selling pressure one has seen? Do you think that when it comes to 2016 as well, they are going to remain on tenterhooks and continue to sell?
Sashi Krishnan: 2015 has been a year when foreign institution investors sold quite heavily into the markets and I would presume rightly so because they did expect a fair amount of depreciation in currencies across the world. I have not seen over the last couple of years two continuous years where FIIs actually have had negative flows into equity markets and therefore when some stability returns to global markets, that stability could possibly return when we see issues in China getting sorted out and possibly when the dollar strengthening pauses. So at that point of time, I do think that foreign investors will start getting back into emerging markets. But maybe for the next couple of months, you may see continued selling by foreign institutional investors from emerging markets including India. But I strongly feel that foreign institutional investors will return once a lot of these global instability gets sorted out.
Get Unlimited Access to The Economic Times
