Monday, January 9, 2017

Market Outlook for Equities in 2017 - AMC Viewpoint

Please find below a brief summary of Market Outlook for Equities in 2017 from various AMCs. 

Birla Sun life AMC

In the next two to three quarters, macro data and companies’ results could be volatile. However, as things stabilize in H2-FY18, earnings could recover.  We expect the earnings of Nifty companies to grow at 19% in FY18 led by financials and autos. The year 2017 will see lower bond yields and fixed deposit rates. It will see falling real estate and gold prices. It is equities that is providing a good alternative for investment with a medium term horizon. The valuations are reasonable & the base for sustained earnings growth is being set up.

The Indian markets are in a consolidation phase due to two major reforms in the form of Demonetization and GST. One may go with a base case estimate of 10-15% returns from Nifty Index in the year 2017. The next six months would be a good time to build the portfolio in a staggered manner. The large cap, multi cap and balanced funds should be considered for investment. In case of investors following SIPs – keep them going in which ever fund and category you have chosen.

DSP Blackrock Mutual Fund

We expect corporate earnings growth to improve from the second half of FY2018 as the headwinds of the last few years (lower commodity prices, higher banking system NPLs and lower Government/private capital expenditure) could turn into tailwinds. On equity markets, we believe 2017 will be a strong year after almost two years of negative returns. Attractive equity valuations relative to bonds, stable currency, policy reforms and stabilizing global growth bodes well for equity returns this year. A pick up in corporate earnings growth, full transmission of lower interest rates and expanding return on equity (ROE) for corporate India will be the medium to long term drivers for equity markets. Within portfolios, we expect value stocks to outperform growth stocks in 2017. In summary, we believe that the Indian equity market is a good structural opportunity and our outlook is positive for 2017.


In the last two-three years, all but three sectors in Nifty delivered reasonable growth in earnings and the three sectors where earnings have not grown are corporate banks -- both public and in private sector, metals and engineering and construction companies. Each of these three sectors had challenges specific to them. Banks were grappling with high provision costs. Metal prices were quite low till last year. They have recovered of late. As for engineering, the capex was quite weak. And these are the three sectors where earnings have actually fallen by 50 odd per cent and that is the result of weak aggregate earnings growth and that is what we have always said that aggregates hide a lot and you cannot really focus too much on the aggregate.

As we look forward to the next two years we see interest rates moving lower. Almost 50-60% of the bank deposits have been lent to the companies. This is a massive number – around Rs 50 lakh crore. If you save 2% on that, it is Rs 1 lakh crore a year, which is a very large percentage of the profits of Indian companies and that will flow through. I think lower interest cost will itself support significant improvement in earnings. Each of these sectors are likely to see a return to normal profitability over the next two years. In metals, we are sharply moving in that direction and we should see it in the next few quarters itself. For corporate banks, most people agree that the worst of NPAs, the provisioning cost is over. They may still remain higher than normal but over the next two years, one should see a return to normal levels of profitability. In engineering and construction, we are seeing great improvement in roads, railways, power T&D. I believe even in that we are moving in the right direction. If you look at market cap to GDP in India, we are trading near all-time lows of market cap to GDP. But PEs are not close to all-time lows and the reason is because corporate profitability is still a near a cyclical bottom. Over next two years, we should see improvement in aggregate profitability and earnings will catch up. Equities should be considered with an investment horizon of 5 years.

ICICI Prudential AMC

There is a case for being moderately overweight on equities with 2 year view.

·         This is with an understanding that volatility is likely to prevail up to next March 2017
·         Post that we believe de-leveraging cycle may start playing out and capacity utilisation may increase leading to improvement in earnings
·         Valuations have turned reasonably attractive and one should invest lump-sum in pure equity funds in a staggered manner upto March 2017
·         We like Largecap and Multicap funds over pure Midcap funds. Dynamic Asset Allocation Fund remains good investing avenue for conservative equity investing


Interest rates in India, will remain a hotly debated argument. Unfortunately, inspired by the bellicose electronic media’s style of discussion, this too appears to cut a deep wedge between the two opposing sides. While slower economic growth and a drop in credit growth may be the reasons for a sharp drop in interest rates, the looming danger of higher crude oil prices as well as of other industrial commodities and the hike in US 10 year and the narrowing gap between the India and US 10 year yield will be touted as the reasons for maintaining or marginal interest rate drop. Either way it will be a shrill and deeply contested debate all year through. Finally, will Nifty earnings growth cross the double digit “barrier”. Save FY 14 (also an election year), Nifty earnings growth rate has been subdued (< 6%). Will the economy get the double benefit of de-monetization (greater tax compliance) and GST, or, like the last three years, the street will start projecting 20% growth in FY 20!

Lastly, a general comment. Investing in equity is always a leap in faith as it is an exercise to predict the future. Forecasting future correctly is a low probability exercise. More important for an investor is the time spent invested in the market rather than timing the market. In a similar vein, while trying to forecast key events may help in timing the market, most beneficial for investors would be to remain invested in the market. Hence, while being aware of key events and their impact will make you an informed investor, staying invested in the market through time will boost your chances of transforming one into a high return generating investor.


The Indian equity markets have seen some correction in recent times due to uncertainty created on account of demonetization along with a risk off trade impacting emerging markets as a whole. This has led to some good franchises being available at better price points. In our view, the Indian economy has a limited impact from the US election outcome and global risk-off events are good entry points into the Indian markets. The domestic economic growth is likely to resume upward trend post the near term challenge thrown up by demonetization which in turn might lead to improvement in corporate earning cycle in 2017. The inflows in domestic funds are likely to remain undeterred given low exposure of domestic household savings in equity funds and the unattractiveness of other investment avenues. We believe that the current weakness in equity markets could provide a favorable opportunity to investor to further their exposure towards Indian equities from a medium to long term perspective. Markets are currently trading at 18.9xFY17E EPS and 15.5xFY18E EPS (Nifty valuations, free float⁠⁠⁠⁠)

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Saturday, January 7, 2017

If You Have the Money Go and Start Buying Now

In an exclusive interview to ET NOW's Nikunj Dalmia, Rakesh Jhunjhunwala, partner, Rare Enterprises

Q. Should an average Indian, who has not looked at equity, be looking at it as an asset class now?
The process of getting Indians to invest in equity is a journey, not a destination. Every year their participation into the markets is going up. A very big reason money should come into equity, and it is coming, because alternative asset classes are not doing well. On the other hand, I am told mutual funds are attracting about Rs.10,000 crore a month. That is how market has survived. It has absorbed $2 billion of foreigner selling.

Q. Should we stop getting obsessed with FII flows given that domestic flows are strong?
I always had a feeling that the local money will overtake the FII money and that is slowly starting now. So, I am sure that local money will come.

Q. How far away are we from the earnings resurgence?
There is investment and there is consumption and there are exports. On the consumption side, it is not so bad. The problem is we are not able to revive investment. Investment is about 31-32% of the GDP, and we have to take it to 37-38% level. That is going to give the real kicker to growth. We have to take steps to revive the economy

Q. Six months ago, you said consumer stocks were expensive. Now, they have corrected. Is there a good entry point in consumer names now?

Well, I do not want to give any example. But if you ask me, I would say it is time to buy. I think the primary reason for FII selling will reverse, and a lot of local money will come. The markets are very bearish about demonetisation.The revival in demand will be far, far faster. In fact, the Nifty has indicated technically, having rebounded from the 7,900 levels, that if you have the money, go and buy.

Q. Do you think 2017 could be a good year for the index?
I think if we have good monsoon and there is some revival of investment demand, we should do well.

Q. Do you think markets can make a new high in the next 12 to 18 months?
Well, I will be disappointed if they don't.

Q. In 2016, the political mandate has been unprecedented globally. Should we prepare ourselves for a different and a new world because historically we have seen political policies tend to influence and impact economic policies?
Markets went down in October, November and December because of demonetisation and the election of Donald Trump as the president of the US. Demonetisation came as a shock, but I think things will normalise far faster than what people expect. The shock made everybody hyperbolic about what the consequences would be. Themarket has already priced in the worst for the quarter. And I do not see that the common man has been affected by demonetisation. In fact, nobody has been affected -not the person who is buying a motorcycle or building a small house.

Also, everyone was suprised by the way the Nifty came back from 7,900 to 8,200 in just three trading days. There was no premium in the futures. That also indicates that technically market is telling you that it does not want to go down.

So, on the basis of a far faster recovery from the effects of demonetisation than the market expected, a good fourth quarter performance, a friendly budget indicated by the government's concern on market reaction, and abatement of FII selling as Trumponomics effect temporarily wears off, market should reverse itself. Now, how much it will go up, or what will go up is difficult to predict. But I think markets have surely made some kind of bottom.

Q. Can we go higher with this kind of earnings numbers? Revival in earnings has not happened and that may not happen for another two-three quarters...
Well, I do not know why it should not happen for the next two-three quarters. Before demonetisation, everybody was very bullish; the second quarter results were very good and I do not think demonetisation is going to leave such a bad or lasting impact on the economy.

Q. Do you think there is a case for PSU banks to get rerated? Suddenly they have deposits, their CASA is going higher, their ability to lend will go higher...
The problems here are deeper than the opportunities there. Unless the NPA situation is resolved, I'd stay away.

Q. So you still feel the NPA problem for banks is not over?
It is not fully known. First, we should fully know the situation. I know so many of corporate houses, which are not going to pay and they are not classified as bad. There could be opportunity, but as an investor, I would wait.

Q. You have liked housing-finance companies (HFCs) in the past . Now, there is a commitment towards push for low-cost housing. Interest rates will come down, real estate prices won't go higher, and yet HFC stocks have corrected. Is the market giving an opportunity here?
As a sector, HFC is one sector which is going to grow. I can't say which individual company to buy or not to buy, but as a sector that should do well.

Q. Do you think this market is lacking any kind of an leadership? It was IT to a large extent in 2000, cement in 1992-1993, and infrastructure in 2003-2008. Right now, there is no clear leadership in this market...
Well, the NBFCs were leading earlier. The midcaps in general had gone to stratospheric valuations so I think leadership will emerge with time. Some of the public sector stocks were doing very well. The real froth in the market is in the new issues. People forget that Polaris is a good company. Its issue came at Rs.400, and then it touched Rs.2,800, and then it was Rs.70. I don't believe in the kind of valuation some of these new issues are getting and I do not know how funds are buying them. There is going to be a disaster here.

Q. Are you confident that demand will come back and that will lead to an EPS growth? You are not making a case that there could be scope for the further PE expansion for the market...
See, low interest rates and earnings growth are always followed by PE expansion. Let the earnings growth come, PE expansion will come.

Q. Metals index for 2016 gave a stunning comeback of 52%. Do you think a new cycle has started in commodities?
I think it is only a correction or fall in the bear market. Last year, I have been wrong but I am not bullish on commodities at all. I do not think the Chinese demand can come but I think at these level of pricing or even pricing 20-25% below this lot, it is extremely profitable to produce commodities. I am not bullish on commodities.

Q. If at all, you think commodity prices will freeze on the higher level rather than...
Not only freeze, they will correct also.

Q. Even crude?
Crude may go to 60.

Q. You made a point last time that IT companies are going through a cyclical slowdown; it is not a structural slowdown. But in this financial year, Infosys cut its guidance twice...
Well, cyclicality can last for a year or two years if you have had 15-20 years of continuous growth. Cyclicality can slow you down for a year or two. If there is going to be automation everything involves software and I have confidence in Indian entrepreneurs that they will be able to adjust to the new normal.

Q. Do you think Indian IT entrepreneurs should take higher risk now? They have a lot of cash on their books that is denting their return on equity and return on capital. They are not going and acquiring small businesses, they are not buying growth. Do you think they need to change that?
They are very successful. If you ask me that would be a good idea to use the cash on the balance sheet and acquire and try and go fast.