Navneet Munot, chief investment officer of the country's sixth largest fund house, SBI Funds Management and of SBI Mutual Fund, has been maintaining bullish views for two years.
With the election outcome, his belief has strengthened, as he tells Chandan Kishore Kant.
Edited excerpts:
Has a cautious stand in terms of investment in stocks taken a back seat?
Certainly. The decisive mandate has, for once, addressed the policy uncertainty issue for India.
We can expect the outcome to have a positive rub-off across all socio-economic strata and should kickstart the corporate earnings cycle in the medium term.
The faith in equities would return as one continues to witness sustained positive economic returns here, as compared to other asset classes.
Market experts have given several high-scaling targets for the key indices. Do you expect any hurdles in that?
Those targets are basically pricing in an earnings growth of 16-17 per cent (annually) over the next three to four years, with some re-rating of the market.
Of course, the gains would be front-loaded as the stock market doesn’t deliver returns in a linear fashion.
Given the connectedness of our markets with the rest of the world, an external shock could be a hurdle. Though, India looks poised for a sustained bull market.
You sound quite bullish. Do you expect retail investors to knock sooner or later?
One has to realise that the environment has changed, and changed for good. While all this is happening, the markets are at their 20-year average valuation highs.
Global investors have maintained their faith in the India story with allocations of $90 billion into equities over the past five years.
In a world awash with liquidity and so short of investment avenues, India will continue to attract large flows, given the relative opportunity and valuation.
We expect a gradual increase in domestic savings that will be channelised into productive financial assets. The current rally has potential to gain sustained momentum as local investors start increasing equity allocations.
Are you playing theme-based investments?
The nation has taken a strategic reboot. In such an environment, the markets would extrapolate core themes that have governed the (poll) mandate.
We feel themes that invigorate resurgence of the economy like agricultural productivity, urban upliftment, manufacturing resurgence, workforce skilling, and service efficiency would drive the next leg of the India story.
These are themes that remain critical to deliver infrastructure, to address supply-side issues that have been at the core of inflation in recent years. We also feel some of the existing themes of consumption enablers, competitive exports and branding at the bottom of the pyramid would open opportunities that would be more stock-specific.
Which top three sectors are on your radar now?
The laggards in the last regime would be among the first beneficiaries of policy changes.
We expect the early cycle benefits of recovery should flow to sectors such as power. The immediate focus of the government would be to address the low hanging fruits like clearing of resource allocations and project approvals that can kickstart a sizable portion of the clogged economic system into productive assets.
We feel the industrial sector would also benefit from opportunities created due to indigenisation of defense and investments in railways over a long term.
Is there any place left for the so-called defensives?
In a distressed cycle, the markets reward efficiency and earnings power. Defensives move to a pole position in such an environment.
However, when positivism sets in and momentum starts taking over, the markets start rewarding growth and leverage more.
Tactically, some of the stocks within the so-called ‘defensives' space would retain favour where growth surprises exist, primarily on the back of revival in discretionary consumption or the business scale opportunity.
What are you most bullish on - large, mid or small-caps?
There are opportunities to make money across the cap curve. The period gone by had a bias towards large-cap stocks.
This lopsided demand did create an interim period when almost two markets co-existed at a divergent side of valuations -- defensives versus cyclicals and large-caps versus mid-caps.
While the market in its recent rally has covered some of the divergence, we expect the mid-cap segment to continue to be at the forefront on stock performance in the period to come.
Is strengthening of the rupee a concern? How do you plan to play around currency in terms of taking investment calls?
The rupee has certainly regained its lost ground over the recent past, to emerge as among the most stable and strong currencies.
The India story is set to garner a sizable portion of both FDI (foreign direct investment) and FII (foreign institutional investment) flows to its emerging market peer sets. RBI (the Reserve Bank) has ably demonstrated its abilities to navigate through a volatile currency environment and should continue doing so.
While a renewed focus on supply infrastructure more than addresses appreciation worries for manufactured exports, a sharp appreciation should also benefit in low inflation and lower subsidies. Financials and energy provide a double play on this front.
With the P J Nayak committee report on public sector banks, have hopes revived or are you continuing with private banks?
Expectations are that the systemic issues of these banks will get addressed. However, even if growth comes back, a lot of them are starved for capital at their current balance sheet efficiency.
The hopes are also linked with acceptance of the Nayak committee report. Some of these are too long ropes.
Structurally, we believe RBI policies would retain the banking space to be competitive enough, to the benefit of the consumer.
The private lending space remains a structural story of customer-centric product innovations, efficiency-driven operations, vigilant risk compliances and sustained market share gains on both the assets and liabilities side.
Over a longer period, one must keep in mind the disruptive effect of technology in financial services, under-appreciated at the moment.