'India is a great bottom-up winner'

'The government is not into an election year, so they will think of what will benefit over the next 20-25 years, instead of only looking at steps that will have immediate effect.'

'Sentiments might be weak but the numbers have gone up.'

 'As for countries which really impact us like Europe, America and Japan, these economies are doing well or have initiated stimulus packages.'

The global and Indian markets have seen big swings recently.

Dinesh Thakkar, chairman and managing director at Angel Broking (below, left), tells Vishal Chhabria and Hamsini Karthik there will be intermittent shifts between risk-on and risk-off trades, best dealt by focusing on bottom-up winners and buying them at right valuations.

He expects the government’s efforts to reflect in FY17 and earnings to grow by 14-15 per cent.

Excerpts:

The US Federal Reserve did not raise rates but globally, market reaction has been subdued. What’s your take on the event and what is the likelihood of risk-on trades (move to riskier but potentially higher yielding investments) gaining momentum?

The markets have already discounted that there will be only very modest and gradual increases in the US Fed rates.

At a broader level, the focus is more on the outlook for global growth, where there are continued concerns regarding Europe and China, though the US economy itself is doing reasonably.

So, intermittent shifts between risk-on, risk-off trades can happen.

The way to deal with this is to focus on bottom-up winners and buy these at the right valuations.

In a global context, India is a great bottom-up winner, given our strong macros, which can attract increased risk capital. Within India, there are great bottom-up winners available across sectors.

From an earnings perspective, too, FY16 earnings were impacted by commodity prices correcting significantly but FY17 earnings should see at least decent double-digit growth.

Which, coupled with a further decline in Indian interest rates, should create the base for attractive returns from equities.

The government has announced quite a few measures to revive economic growth but except for a few sectors like roads, sentiments are low at the ground level. Your reading?

Sentiments might be weak but the numbers have gone up.

Some steps reflect the remedy immediately but for sectors like mining, it takes some time for the impact to be felt.

Yet, it appears the government's steps are in the positive direction and might take two to three years to show up.

Because of the benefit from low oil prices, it has started spending on roads and the results are showing.

Also, the government is not into an election year, so they will think of what will benefit over the next 20-25 years, instead of only looking at steps that will have immediate effect.

The government is not being populist, either, by increasing subsidies; instead, they are reducing cost and subsidies.

I am happy with the steps they're taking but numbers will take some time. FY17 will see positive numbers.

Is the post-Budget rally in the Indian market sustainable?

The markets had already corrected significantly ahead of the Budget, with a lot of the concerns already priced in. However, many positives emerged from the Budget which fuelled the rally.

The finance minister stuck to the fiscal road map, which should allow the Reserve Bank (of India) to further cut rates.

The increased and focused spending through rural and infrastructure schemes is expected to provide a fillip to consumption-led demand.

These factors, coupled with a strong monsoon, are expected to drive earnings growth in FY17, making the current risk-reward ratio highly attractive.

But, the global environment is rough. How bad could it turn for India?

The market is discounting two things: an increase in interest rates in the US and China being faced with a slowdown.

But, only one of these can happen.

If there is a slowdown in China, the US can never increase interest rates; it will do so only if everything is fine.

So, there is an upside in both cases.

China has an issue but it has to be resolved internally.

China’s slowdown might impact global economic growth by half a per cent (yearly).

As for countries which really impact us like Europe, America and Japan, these economies are doing well or have initiated stimulus packages.

With these economies gearing up for growth, I don’t believe a China slowdown can have major impact.

So, the next two quarters, whatever happens to the Indian markets, are a good time for investors to enter.

What will be the key drivers of earnings growth in FY17, which you are pegging at 14-15 per cent?

Thirty per cent of the banking space, the pharmaceutical sector and information technology will drive growth.

Even Reliance Industries should contribute to growth. Stocks in these sectors will cover 70-80 per cent of the weightage.

Earnings for metals, presently negative, might come back to zero or lower single-digit growth levels.

As an investor where should one look at to get good returns? Mid-caps, small-caps or any other theme?

It is not easy to have a portfolio focused on small-cap and mid-cap stocks. Investors should take the mutual fund route for exposure to mid-caps. However, index stocks have performed well.

They have given consistent (annual) return of 14-15 per cent, excluding dividends.

Looking at the valuations now, it appears that if someone is investing for two-three years, he would get an appreciation of not less than 15-20 per cent compounded annual return.

So, the downside risk appears to be only five per cent, while the upside is over 15 per cent.

Performance of both the sectors would be almost equal.

At the valuation where we are, I don't see much arbitrage between large-caps and mid-caps.

The top image is used for representational purpose only. Photograph: Reuters. Dinesh Thakkar's photograph: Kind courtesy, Angel Broking's Facebook page.