Contributed by: Volunteers of CFA Society India
The 9th IAIP Annual Forecast Event FY2017 was held on 31st March 2017 at the BSE International Convention Hall, Bombay Stock Exchange, Mumbai.
Everytime we attend the Annual Forecast Event of IAIP, we come out with unique perspectives from the panelists. This time around Sankaran Naren, CIO of ICICI Prudential MF talked about the 4-Bs of the bull market – the best phase, the boom phase, the bubble and bust phases. According to him we have passed the easy and best phase. Nilesh Shah, MD, Kotak MF, spoke of the initiatives like savings in electricity consumption through the installation of LED bulbs across the country, or the channeling of the cash economy into the mainstream, which could the used for more productive purposes. According to Siddhartha Sanyal, Chief Economist at Barclays, India is best placed on macros like inflation, fiscal deficit, current account deficit and the present government was rightly working on the supply side constraints. Pratik Gupta, MD, Deutsche Bank, mentioned that foreign investors have become more confident about Indian markets post state elections as they think the present regime can continue beyond the current term. While every body is positive on the India story, Prasun Gajri, CIO, HDFC Standard Life, expressed concerns on the limited number of securities to invest in based on both the size and valuations.
The rest of the key takeaways are as follows…
CFA annual forecast event highlights – survey results for FY18 expectations –
- 77% expect equity to be best performing asset class but majority expect Sensex to see single digit growth at 30-32k.
- 28% expect GDP growth to be at 7-7.5.
- More than 85% expect CPI to be less than 5.5.
- 75% expect bond yields to be less than 7%.
- Crude: 45% expect 50-60.
- Gold: maximum respondents expect 1100-1200.
- Rupee: maximum people expect 66-68.
- Sensex earnings growth is expected at 10-15%.
- Critical driver of equities are Government policy and reforms. For GDP, key drivers will be govt policy and global geopolitical situation.
- Salary growth: most people in equities are expecting in double digits!
Highlights of panel discussion –
🔹No worries on inflation, CAD, FD. NPA and capex cycle outlook not great. So themes are centred around consumption, GOI spending and exports.
🔹Market PE expensive but PBV and PE to bond yields is fine. Situation not alarming like 2007. Best phase where valuations were cheap is over. We are in boom phase now where multiple is given to earnings. Bubble stage will come when people give multiple to top line like it happened in dot com boom and now in e-commerce. This will be followed by bust.
🔹Metals and oil and gas are sectors from where earnings are coming. In banking it will take few years for earnings to reflect.
🔹In India government has worked across sectors to reduce margins in favor of customers. While this is not good for cos, it has been good for inflation and interest rates. The pricing on LED bulbs was reduced from 500 to 35 per bulb. As a result consumers saved 11,000 crores and in future it will lead to 40,000 cr saving in an year.
🔹three plans of GOI behind demonetization –
- plan A was that 3-5 lakh crores won’t come back in system and they will be able to spend that amount on growth. But almost all the money came back.
- Plan B was 1.8 Million individuals sent emails by IT. So 50k to 1 lac cr to come through taxing black money which could be 10 to 20 % of money that has come in system.
- Plan C: GOI expected to print less in cash by 5 lakh crores, which will remain with banks.
CFA annual forecast event highlights continued –
🔹China was equal to India in 1980. Now it is 5x us due to credit infused boom. In India entrepreneurs are not given enough credit.
🔹In PSU banks majority of top management posts have been filled in past 90 days. In next few months some big bank arm will come out with announcement on NPA takeover. The 10,000 cr PSU recapitalization amount will have to be revised upwards.
🔹In affordable housing effective interest rate of 2.5-3% is less than America. 3.75 cr retirees have 10 lakh crores in EPF. 90 % of it can be withdrawn for buying a house. 75% for buying a car. With 30% discount today whole of India turned 2 wheeler buyer. The builders are now getting loans at 8-12% as against 14-15% earlier. So by accelerating credit growth India can have its China moment.
🔹Stability of GOI policy expected as it’s widely assumed that CEO of India Mr Modi will continue for 7 yrs. Stability of rupee is another criteria for international investors.
🔹In near term March quarter earnings may be bad and monsoon has to be looked at. But the foreign money is not coming for 2-3 months but for next few years.
🔹India a good top down story at present. But bottoms up conviction still not there for analysts. While earnings have started appearing, the cheaper valuations in some sectors and stocks don’t make sense.
🔹Equity index to see 9-10 % growth. Even if some earnings disappointments happen, market will not see sharp correction.
🔹Conservative outlook on NPA and capex cycle. But not impossible to see positive surprise. At present coal supply is abundant, investment in power generation happened, FDI was eased, roads are being built, interest rates are down. So if this continues then positive surprise possible.
🔹On being asked why is tail wagging dog – why are some small caps expensive then large caps – Mr Nilesh Shah said – we have grown up believing that men go for Olympics and women for Miss World. But now women go for Olympics and men for Mr World! Similar is case with investing – in FY15 and FY16 though the earnings growth of BSE 200 aggregate was not good, it had 105 and 111 cos showing 20% and 30% growth respectively. So while analysts look at BSE 200 aggregate as a fund manager he is only concerned with looking at those 5 companies with good earnings growth. FY18 will provide similar opportunities for finding those 100 companies with 20-30% growth.
🔹There are pockets of value in infrastructure. Metals will show strongest growth in earnings this year. In financials and telecom they are in negative cycle now but outlook is good for 3 years. It will become a concern only when analysts start giving elevated and outlandish multiples. Non affordable housing to see some deleveraging.
🔹If credit picks up then interest rates will pick up, else in a realistic scenario there may be some scope for rates to go down. While RBI may not cut rates, it may leave ample liquidity in system which will keep rates lower.
🔹With prevention of corruption act, things should improve for PSUs and they are likely to turn favourite of investors (from ugly duckling).
🔹While Indian population has become brand conscious and most listed stocks are brands, the increasing brand consciousness among non urban population, disruption from cash to cashless and GST will lead to higher volumes, profit margins and stock prices for organised segment.
🔹On global front US Fed is increasing rates at controlled pace. So not a concern. With rupee strengthening, 45 – 50 % nifty earnings global in nature but over there change in regulation is more of a concern than exchange rate. Also India imports more than it exports.
🔹 According to RJ’s quote “If the girl is pretty the suitor will come” and India will have no issues on this front.
🔹 In 1990s, during an IPO major amount of funds were stuck for 90 days. Now due to efficient mechanism it’s cut to 7 days.
🔹For insurance companies selling ULIP is not an issue. NPS corpus also increasing. Some Mutual Funds are seeing good inflows
🔹Telecom currently out of favor but 3 years down the line industry will be organised and rational after consolidation phase.
🔹For contra call market capitalization of industry should be seen versus others. For example IT 10 lac cr Market Cap is not cheap vs other industries. In telecom it is lower versus telecom in Indonesia.