Ask The Experts: India Equity Market To Give Reasonable Return for 2017
Mr Rana Gupta, Managing Director, Indian Equities, Manulife Asset Management shares with us his outlook on India.
Market Outlook on India
1. How has India equity market perform in 2016? What is your outlook for this market going into 2017?
If you look at 2016 performance, India equity market trail most of its peers. Going forward to 2017, we believe the India equity market will return in line with the earning growth, led by more government spending, lower rates and benign base. Our view on Indian Rupee is that it will remain stable vis-Ã -vis other emerging market currency. This is due to lower inflation in India, lower current account deficit and very strong foreign reserve position. We would expect Indian equity market to give a reasonable return for 2017.
2. Are the valuations of India equities attractive?
The valuations are in line with historical averages which is reasonable. The valuation is attractive when you see a longer-term growth context. For example, if you look at air conditioners, the penetration is only 5% as opposed to 35%-40% of the emerging markets. So, there is long term growth available as the economy grows, income rises. In that context, the valuation looks quite attractive.
3. What is the long-term and short-term impact of Indiaâs currency recall and sales tax reform to the countryâs economy?
What the government has done in the last 2.5 years: the government has work on banking account (Jan Dhan), unique identification number for each Indian (Aadhaar), and united payment interface through digital transact (Mobile) â âGEM-Trinityâ. The âGEM- Trinityâ has given ordinary Indians the ability to identify themselves online and transact online.
The government also works on sales tax reform (GST) to encourage informal or semi-formal business to formalize themselves. Formalization of a vast informal economy is already set in motion through GEM trinity and sales tax reform.
Currency recall is disruptive in the short term because it impacts large portion of currency circulation but in a longer-term view, it also pushes the process of formalization. All the businesses now have to formalize themselves and do business in an organised manner. Longer term benefits will outweigh the short term disruptive impacts of currency recall.
4. Where do you find investment opportunities in India? What sectors or themes within India you have the most and least preference for and why?
The themes to play is interest rates sensitive -company or sector that benefits from lower interest rate. Our view is that certain mid-size banks will benefit the most; auto companies will be benefit as well. Government revenue is growing so they will spend more on rural India, construction, affordable housing and transfer money to the family who is living below the poverty level. All these also lead us to be positive on consumer staples and consumer durables companies. Companies that we are not so positive on will be large cap generic pharmaceutical companies selling in the US and telecom sector within India.
5. What are the key risks that investors should be aware of? How is your strategy positioned to mitigate these risks?
The key risks to watch out for is GST implementation. There will be some troubles around GST implementation but we see the problem as transitory. Next will be oil prices. India import lots of crude oil so if crude oil price increase to $65-$70, that could create pressure on the government finances as well as inflation.
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