INTERVIEW. 'Earnings downgrade cycle is largely behind us’

With most of the triggers lacking for Indian equity markets, all eyes will be eagerly waiting for the next two big events—monetary policy and fourth quarter results. Sanjay Kumar, chief investment officer, PNB MetLife Insurance, sees earnings to have largely bottomed out and expects the Reserve Bank of India to cut rates by 25 basis points in April. He is positive on sectors like urban consumption theme including automobiles and consumer discretionary, urban infrastructure, housing finance, private sector banks, information technology, cement and rural focussed companies.

What investment strategy have you adopted in the last six months? Why?

We have been positive on urban consumption theme including automobiles and consumer discretionary with additional impetus from the Seventh Pay Commission implementation this year. We also like urban infrastructure and housing finance companies. We have been buyers in high-quality private sector banks due to their strong retail focus, comfortable capital position and good asset quality. We have also been overweight on the information technology sector given its superior return ratios, reasonable valuations and currency tailwinds.

Whether the same strategy will continue? Why?

Broadly, our current strategy is likely to continue going forward. Incrementally we have turned positive on cement given some signs of demand and price recovery. We have also turned positive on selective rural-focused companies given government’s strong focus on rural infrastructure.

Do you see improvement in performance from the fourth quarter results? Why?

The fourth quarter results are expected to be marginally better than the previous quarter. The sectors where we expect continuous growth momentum are retail-focused private banks, automobiles, consumer discretionary and select engineering and infrastructure-focused companies. The sectors where we believe earnings have largely bottomed out, but there could be marginal downgrades, are industrials and corporate-focused banks. The earnings downgrade cycle is most likely to come to an end over the next one or two quarters.

How much rate cut do you expect by the Reserve Bank of India? Why?

Adherence to the fiscal consolidation roadmap, sharp reduction in small saving scheme rates, benign inflation readings and recent weakness in macro-economic growth indicators have significantly strengthened expectations of a 25 basis points rate cut in the upcoming monetary policy meeting. Going forward, developments on monsoon front and inflation trajectory would play a crucial role in determining future rate cuts. Overall, we expect 50 bps rate cut by RBI in FY17.

Markets have recouped the losses made in the first two months? Do you expect the same to continue?

The decline in markets in the first two months was due to money moving from emerging markets including India to developed markets. Going forward, factors that would determine market trends are expectations of rate hikes by the Fed including the commentary, monetary easing by other central banks such as Bank of Japan and European Central Bank, risk-on or risk-off environment globally and movement in crude oil and commodity prices.

What is your view on the emerging markets including India after recent rally?

There has been no fundamental positive change on the demand side for commodities and to that extent it was a technical rally in the emerging markets. India’s fundamentals are quite strong and different from its EM peer set since it is a net importer of commodities unlike most emerging market economies. Hence, it is a beneficiary of current global economic backdrop and hence in a superior position compared to its EM peers.

The Union Budget also demonstrated government’s strong commitment towards fiscal discipline and economic growth. The earnings downgrade cycle is largely behind us and we expect the economy to recover gradually. This, along with transmission of lower interest rates, impact of seventh pay commission implementation and recovery in rural demand, is likely to increase growth momentum going forward. Considering these aspects, we believe India is a strong bottom up investment destination within emerging market segment and is likely to get a fair share of EM flows.

How much has been the average return of the scheme?

Our diversified fund (Flexicap Fund) has consistently outperformed its benchmark over short as well as long-term periods. The compounded annual return over last three years has been approximately 13.7 per cent for this fund compared to benchmark return of 11.7 per cent as on December 2015.

What is the best cyclical sector according to you?

We believe automobiles is the best cyclical sector to own given the high-quality companies in this sector, strong historical return profile and lower earnings volatility compared to other cyclical sectors. This sector also benefits from strong export opportunities as well resilient domestic demand due to low penetration levels.

DIIs have been net sellers in March after a long time (October 2015) and highest (since January 205)? How much of the selling is by insurance?

While specific data for insurance companies is not available, DIIs excluding MFs have been net sellers in equity markets in March 2016 till date.

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