'Markets in 2017 will be dominated by global events'

'We believe 2017 could see higher flows from foreign institutions as money comes back to growth markets like India.'
Illustration: Dominic Xavier/Rediff.com

Anup Maheshwari, executive vice-president and head of equities & corporate strategy at mutual funds entity DSP BlackRock, tells Puneet Wadhwa he expects expect earnings to grow by 3 to 4 per cent in FY17 and 18 to 20 per cent in FY18.

How do you see the global equity markets in 2017?

Calendar year 2016 was dominated by global events and we see a similar trend going into 2017.

We see more rate hikes by the US Federal Reserve after Donald Trump's win in the US presidential election and the expected fiscal boost by his administration.

A strengthening dollar, along with higher commodity prices, might impact near-term growth, flows and corporate earnings in emerging markets (EMs).

How are you factoring Trump's proposed policies in your investment strategy?

It would be premature to so react. However, we believe sectors like information technology could be most at risk (till further clarity emerges), where we already have an underweight position.

However, if you look at the US equity market performance, with the S&P 500 up six per cent since the Trump victory, it seems the market participants expect Trump to be more rational with his policy decisions.

What is the road ahead for fund flows to EMs?

Foreign institutional investor flows have been muted in 2016, with net inflow into Indian equities of $3.2 billion as strength in the dollar has resulted in money flowing back to developed markets, from EMs.

This is much below the past five year average of $13.5 billion a year and the peak of $29 billion in CY2010.

We believe 2017 could see higher flows from foreign institutions as money comes back to growth markets like India.

Are the Indian markets factoring in the worst as regards the impact of demonetisation on economic growth and corporate earnings?

It would be premature to fathom the impact so early.

The move is a significant one, considering only 0.2 per cent of gross domestic product was up for demonetisation in 1978 versus around 10.5 per cent of GDP currently.

Demonetisation, GST and other government measures to curb generation of undisclosed money and move towards the more formal economy will eventually lead to a higher tax to GDP ratio and tax compliance.

This would help boost government revenues and support higher capital expenditure, and lower the fiscal deficit.

While this would certainly have a near-term impact on consumption, growth and corporate earnings, we believe this move will boost growth and tax compliance over the medium to long term.

We expect earnings to grow by 3 to 4 per cent in FY17 and 18 to 20 per cent in FY18.

Your expectations from the Union Budget?

We believe it will be better than expectations on more counts than one, considering the government has limited time to deliver on growth and job creation.

On the fiscal deficit targets, we strongly believe India is a developing economy and a marginal slippage on the targets to boost infrastructure and growth should be taken positively.

Do you find Indian markets expensive at the current levels?

We believe the S&P BSE Sensex is trading at reasonable valuations of 16.3 times the FY18 earnings, marginally above its long-term average.

While foreign portfolio investors have generally been overweight on India for the past couple of years, the extent of the overweight position has come off sharply over recent months, led by factors like a strong dollar and sell-off in EMs.

How are FIIs seeing developments in India?

FPIs are particularly concerned about the tax environment.

A recent circular speaks about tax on indirect transfers, which will certainly impact future FII flows.

Clarity on this front will bode well for future flows.

Sectors you are overweight and underweight on?

We are constructive on the health care space.

We believe the ongoing issues with the US regulator are temporary and the companies will come out strongly from this over the medium to long term.

Conversely, we continue to be cautious on the IT sector.

We remain constructive on the banking and the oil and gas sector, while maintaining a tactical strategy on metals.

We also see opportunity in textiles, agro chemicals, speciality chemicals and pharmaceuticals.

Finally, we need to keep an eye on the telecom and utilities sectors this year as well.