In an interview with Outlook Money, Ritesh Jain, CIO, Tata Asset Management, shares his views on the global economy, what to expect from the markets in 2016, specific sectors and more. Excerpts:
What is your view on the markets and the global economy?
2015 was the year of the trinity: Dollar, Crude and China. We believe that this trinity will continue to determine the outcome of 2016, again. A strong dollar has a deflationary effect on commodities as most global exports are largely denominated in dollars and the deflationary pressures extend to the rest of the world. A further dollar rally could intensify deflationary forces at work and curb growth. China, in my opinion is a bigger impending obstacle to a global recovery. China is slowing down rapidly and taking a large bite out of global GDP growth.
The dollar, China and crude trinity will be the key determinant of global economic health and liquidity, going forward. The collapse of crude oil and in extension, petro dollars has changed a lot of parameters in the global liquidity equation. Oil producers (most of their economies are pretty much dependent on oil exports) are adjusting to the new reality of lower oil prices. It is low enough to ensure budget deficits on some of these economies for the first time in recent memory. 2015 marked systemic initiatives by the government, but the benefits are expected to accrue with a lag, the first signs of which should be visible in 2016.
What do you expect from the markets in 2016?
2016 will be a year of stock picking as earnings momentum is unlikely to pick up in a big way across the economy. However, quality companies with not too leveraged balance sheets will be rewarded. In 2016, on the policy side, the Union Budget and the direction it tries to give to the economy would be important. Passage of certain key bills GST, real estate, etc, which as of now are seen not happening would be the added trigger.
On the fixed income markets, in contrast to the sticky nature of yields at the longer end, the yields at the shorter or medium segment of the curve end eased significantly. We firmly believe that the sovereign bond yields in India are on their secular path of easing, given the sound fiscal and monetary policy framework currently under implementation. Our base case scenario for bond yields in the year 2016 is of an easing bias, albeit at a slow, grudging pace. If the government indeed revisits its fiscal consolidation path, as hinted in the mid-year economic review, the yields may remain sticky.
As the banking sector continues to reel under the weight of high NPA and slower credit growth, demand and supply for SLR bonds are evenly balanced for FY17, even if we assume a slightly higher fiscal deficit target of 3.5% that was set earlier. However, given the demand-supply dynamics of longer dated bonds, we expect the yield curve to have a steepening bias. On the corporate bond segment, the AAA corporate bonds at the 3-5 years segment will continue to be a preferred space of investment.
Which sectors do you think have the potential to grow this year?
We continue to focus on companies with stronger business models, increasing market shares or having margin tailwinds. These are quality companies run by good managements and delivering consistent bottom-line growth, may be trading at slightly higher valuations. We are staying away from companies in sectors which are trading at apparently cheaper valuations but facing serious issues.
We are of the view that, it is too early to take call on revival of such companies or sectors. Implementation of 7th Pay Commission recommendations and project awards in roads, power T&D, railways, etc would be the catalysts for consumer and infrastructure sectors respectively, in the year coming ahead. We believe that consumer discretionary sectors like automobile, building materials, retail and apparels would do well with more money in consumers’ pocket on account of lower inflation, lower EMIs and 7th Pay Commission implementation.
Is there any market segment you are bullish on?
Some of the consumer staple companies hold good promise as raw material price benefits continue. We are bullish on cement, road EPC and BOT, power T&D and defense-related companies, as well. Retail financiers should also outperform their peers, who primarily lend to corporates as the stress level of corporates is not abating yet. Certain pharmaceutical companies are also looking good with the US product pipeline launch perspective over next 3-4 years and price correction related to FDA related issues mostly behind. We live in a world of ever-changing realties, which are impossible to predict, (who could have predicted $35 oil at the start of 2015), but a few companies will be able to continuously create value despite the environment. While the new year is sure to bring surprises, we continue to believe that in 2016 as well, value will be created by paying more attention to strengthening of business models and avoiding companies with history of misallocating capital.
