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Expert Corner: Fund Manager’s View on Indian Equities

         Mr. Mahesh Patil                  Arihant: What are your expectations         tune of 100-150 bps in H2-FY17. Based
                                           from the global markets?                    on dependence on cash transactions
     Co-Chief Investment Officer at                                                    and operating leverage, different
       Birla Sun Life Mutual Fund          Mahesh Patil: Trump has three main          sectors would be impacted in varying
                                           agenda items – to cut corporate taxes       proportions. Some export oriented
  New Year ushers new                      from the current level of 35% to 15%; to    sectors or the ones in B2B segment
  expectations - let's see what            spend USD 1 trillion on infrastructure      are not affected at all. Just to quantify,
  Mr Mahesh Patil, Co-Chief                and to facilitate companies to repatriate   among the Nifty companies, 43% (by
  Investment Officer at Birla Sun          capital from abroad. As these measures      weight) of companies in sectors like
  Life Mutual Fund expects for             are US growth positive, the dollar index    IT, Pharma, Oil &Gas and Power are
  equity markets in the coming year        rallied to breach the 100 mark decisively,  not impacted. 53% of companies in
  as he speaks to Arihant Research         the 10 year US treasury pulled back 75      FMCG, Auto, and Financials etc. may
  Team.                                    bps to breach the yield of 2.5% which       be impacted for less than two quarters.
                                           was tested earlier and the US equity        Only 4% of companies in Cement and
Arihant: How was the year 2016 for         indices have been touching new lifetime     Paints may see an impact for more than
Indian equity markets?                     highs. The reality could be entirely        two quarters.
                                           different from expectations as Trump
Mahesh Patil: 2016 was a phenomenal year!  would have to build political equity for    Following the effect of Demonetization
More things happened that never happened   all the three agenda items.                 will be the implementation of GST.
before.                                                                                The businesses have to further readjust
                                           China could continue to support             to the new indirect regime resulting
Brexit and Trump triumph were low          investments in the economy through the      in destocking and change in current
probability outcomes until the voting      quasi fiscal stimulus as it did last year.  operations. Though we see impact
day. The results gave voice to the         The weaker currency (depreciated 12%        on growth in the short term, both
powerful majority that was unheard         in 17 months), would help in exports.       demonetization and GST are immensely
before. The central banks of ECB and       The soft landing is a work in progress      beneficial in the long run. The tax net
Japan set policy rates below zero which    for China. The comments and actions         would widen, tax compliance would
took over a third of the developed         of Trump on China have to be closely        improve, more banking services would
bonds to sub-zero levels. The fall in oil  watched.                                    be accessed and more businesses move
prices prompted the OPEC and other oil                                                 into organized segment.
producing nations to collectively agree    Eurozone will have a politically
on production cuts for the first time in   heavy year with a possibility that far      Development is not only an economic
eight years.                               right parties could win in France and       necessity but also a political one.
                                           Netherlands. As these parties initiate      Elections now-a-days are won and lost
Closer home, a decade old effort to        process to exit Eurozone and European       based on development. As government
simplify indirect taxes found absolute     Monetary Union, markets could correct       is aware of it and it is also aware that
consensus among all political parties to   globally. Since this would be a multiyear   there has been a setback in the near
pass the GST bill. The government was      process, markets could overcome the         term, it is imperative for it to prop it
bold enough to get the long standing       uncertainty.                                up. Cutting direct taxes, subsidized
bills like Real Estate (Regulation &                                                   housing, rural development and
Development) and Insolvency and            We expect the brent crude to trade in the   building infrastructure could be the key
Bankruptcy bills passed. It was bolder     band of 55-65 USD/bbl as it is difficult    focus areas for the government.
enough, in its continued effort to fight   to enforce production cuts and shale gas
black money, to demonetize 86% of          production becomes viable at the lower      In the next two to three quarters, macro
the currency in circulation – which no     end of the price band.                      data and companies’ results could be
country in the world did in the past.                                                  volatile. However, as things stabilize
                                           World economic growth looks good            in H2-FY18, earnings could recover.
                                           with a strong US, a stable China and a      We expect the earnings of Nifty
                                           stimulating Japan. The outflows from        companies to grow at 19% in FY18 led
                                           EM markets may continue in the near         by financials and autos.
                                           term due to strong USD. As valuations
                                           become attractive, the flows into EMs       The year 2017 will see lower bond
                                           would reverse.                              yields and fixed deposit rates. It will
                                                                                       see falling real estate and gold prices.
                                           Arihant: Coming back to India, how do       It is equities that are providing a good
                                           you think demonetisation has impacted       alternative for investment with a
                                           our country? What are the expectations      medium term horizon. The valuations
                                           from Indian equity markets in the New       are reasonable and the base for
                                           Year?                                       sustained earnings growth is being set
                                           Mahesh Patil: Due to demonetization
                                           consumption has taken a setback for                   6 ARIHANT CAPITAL ¡ JANUARY 2017
                                           next 2-3 quarters impacting GDP to the
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