India at a lesser risk from aggressive Fed raise: Tushar Pradhan

'India's sizeable forex reserves should help stem a possible fall in our currency.'

'Lower commodity prices will bring down inflation substantially. This will benefit interest rate sensitive sectors such as banks.'

'Investors should not be swayed by current fads while investing. Adopt an asset allocation approach and construct a diversified portfolio based on your risk appetite.'

India is at a lesser risk than other emerging markets if the US Federal Reserve goes aggressive in increasing interest rates next year, says Tushar Pradhan (bottom, left), chief investment officer at HSBC Asset Management (India). Pradhan tells Ashley Coutinho India's sizeable forex reserves should help stem a possible fall in our currency.

What is your reading of the recent Fed policy statement? How will the Fed rate hike impact the Indian equity market in the near and medium term?

There has been a lot of uncertainty surrounding the Fed policy throughout the year. The recent 25 bps (basis points) rate hike, which was on expected lines, has dispelled that uncertainty. Further rate hikes are expected to be gradual, and we expect three to four 25 bps hikes next year.

If the rate hikes are aggressive, the dollar will strengthen considerably which, in turn, will weaken emerging market currencies. In that environment, global investors will be hesitant to allocate money to emerging markets because weakening currencies will eat into their gains. So, the pace and quantum of hikes are important factors to watch out for.

That said, India is at a lesser risk than most other emerging markets from an aggressive Fed rate hike. This is because our current account and fiscal deficit are under control and we have sizeable forex reserves to cushion the fall of our currency.

What is your assessment of the third quarter performance of Indian companies?

The third quarter results are likely to be weak as there is not much pricing power across the economy and lower commodity prices have led to lower topline growth for most companies. In fact, earnings growth has been below consensus estimates for FY15 and FY16. I expect a marked improvement in the second half of FY17 as the base effect kicks in. The economy is also expected to turn around at about the same time which, in turn, will benefit the equity market.

It's largely the domestic institutional players that have supported the market in 2015. Do you expect this trend to continue in 2016?

Foreign institutional investors (FIIs) have put in about Rs 14,000 crore this year into Indian equities. There have been several months of outflows, largely because of the uncertainty surrounding the Fed hike. Now that the uncertainty is out of the way, I believe emerging markets are likely to get a larger share of FII money compared to 2015. Of course, this is likely only if the Fed does not go too aggressive in raising rates.

It's true that domestic institutions, especially mutual funds, supported the market in 2015. Hopefully, they will continue to put in money in 2016 as well. This is because real estate and gold are no longer as attractive as they were a few years ago, which means more of domestic savings will be channelled into financial assets instead of physical assets. In the worst-case scenario, incremental inflows into equities will stop, but I don't expect domestic investors to pull out money next year.

How will low global commodity prices impact India?

In a way, low commodity prices are good for India, as the government will be able to keep its fiscal deficit under control. Companies that import raw materials which are then converted into finished goods will benefit as well. Export-oriented companies, on the other hand, will suffer because of the low prices. Consumption will get a boost because lower inflation may create a higher demand. Overall, low commodity prices should be beneficial from the point of view of economic growth.

Which sectors are you bullish on?

We think lower commodity prices will bring down inflation substantially. This will benefit interest rate sensitive sectors such as banks. In addition, sectors such consumer discretionary will benefit as wages increase, prices get more affordable and demand picks up. With operative leverage kicking in, cement companies will start to make higher margins.

What is your advice to retail investors at this point?

Investors should not be swayed by current fads while investing. Adopt an asset allocation approach and construct a diversified portfolio based on your risk appetite.