Investors should look at companies and sectors dependent on domestic consumption and avoid those correlated to either global factors or domestic policy-making process, says Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services. He also warns investors against investing in companies with high debt component. Excerpts from an interview with The Hindu :
Has India’s attractiveness compared to other markets gone down recently?
China has slowed down and Japan is in a different league. In the recent past, Russia has done well compared to India. But where we score is the depth of governance, currency stability, democracy and the quality of companies. We have been slow compared to China, but we are more stable. We have a robust capital market structure with good technology, legal systems, governance and a strong regulatory regime.
Foreign flows have been a trickle of what we witnessed last year. Global majors have been taking a bearish stance on India. Will there be a revival?
Foreign investors have definitely slowed down, but its impact has been partially absorbed by domestic mutual funds that have seen strong inflows. Foreign investors are waiting for signals from Fed. I will not say they are bearish, but they are in a ‘wait and watch’ mode. If money comes to emerging markets, then India will also get good allocation. Our currency is stable and we are in a bright spot within the emerging markets pack. Also, retail investors and high net worth individuals have a lot of money. Where can they invest? Banks, debt, commodities, gold and real estate are the alternatives. In a low interest rate scenario, debt has become less attractive. Both real estate and gold are in bad shape. The only avenue for long-term sustained growth and wealth creation is equity. Mutual funds are seeing good inflows after two to three years.
The government has been talking about reforms but the view seems to be divided on whether real action is happening…
If the government is able to push through some of the important reforms like GST then it will be a big positive for the markets. Post-Bihar elections, the government has come out with good liberalisation measures related to foreign direct investment and tax. They are talking about more reforms.
Corporate earnings have been going through a rough phase. Do you expect a revival soon?
I think FY17 will be a good year. Our estimates for FY16 is that there will be a 6-7 per cent earnings growth but there could be a growth in the range of 15 per cent and 18 per cent in Sensex companies earnings. Lower oil prices and interest rates along with stable currency will provide the much-needed support to corporate earnings.
Do political factors impact more than economic ones?
It impacts the investor sentiment at least in the short term. But there is always demand for good quality companies with strong fundamentals. We have seen weaker governments in the past but markets have still rallied. We have got a much stronger government this time. One needs to remember there are a lot of positives for the Indian market. We have a stable and strong currency. Oil marketing companies are doing well because oil prices are down. Exports have slowed down, but are still doing well.
Which sectors are you advising investors to bet on?
While some sectors may take more time than the others to revive, automobiles, banking, pharmaceuticals, cement, oil marketing companies look good along with a few FMCG entities. We are bullish on companies that are well-managed and are dependent on domestic consumption story.
There are a lot of companies with a high debt component. How should investors view these companies?
We always believe in companies that give a high return on equity. Companies that have high borrowing will not be able to generate wealth for investors on a sustained basis as business cycles keep on changing.
