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Interview with CIO, Canara HSBC OBC Life Insurance

Indian stocks have recovered post the Brexit impact and are in the midst of consolidation. Ritu Arora, CIO, Canara HSBC OBC Life Insurance shares her views with Tulemino Antao on the market trends, RBI, sectoral views and the broader markets. Edited excerpts:

With most of the negatives such as Brexit, Rexit behind us what trends do you see for the markets for the second half of calendar year 2016? What is your target for the Nifty by end-December?

Global environment is expected to remain volatile as growth remains patchy, central bankers continue to have accommodative policies encouraging liquidity, uncertainties arising out of Brexit , and possibly sharp currency movements.  

Indian markets will focused on passage of GST bill in the monsoon session, good spread and coverage of monsoons, and signs of improvement in corporate earnings in Q1 results. We believe the efforts of the Government in reviving the economy will be more visible with more green shoots turning stronger. We strongly believe that from here the Indian markets will be directionally positive, albeit with intermittent volatility. There can be some volatility induced by global events but largely would be shrugged off. We remain bullish with medium to long term view and expect Nifty to cross 9000 by financial year end.

What are the near term concerns after RBI governor Raghuram Rajan decided not to continue his term post September?

Mr. Rajan is a very respected high caliber central banker of global repute , who has decided to go back to academia. We hope that the government finds a suitable replacement soon, as uncertainty is what market fears. With the formation of the Monetary Policy Committee, the influence of an individual on policy rates is reduced. However the uncertainty may cause  some near term volatility. As much as the market loves Mr.Rajan, it will cheer and welcome the next RBI Governor of respectable credentials and independent views. Banks are a proxy to the economy. However, recent reports indicate that high NPAs of state-could throw a spanner in the growth momentum. What is your call on the sector as a whole and what are your view on the state-owned banks?

Banks reflect the image of the economy, and are truly a proxy to the economy. We hence remain bullish on banking sector. We are incrementally gaining confidence in revival of PSU banks which are saddled with large NPAs. The focus is now on NPA recovery, resolution of bad assets and  sale of investments to clean up the balance sheets. We believe that the peak of NPA cycle is behind us and we will witness improvements from here on. It may hence be time to allocate weight to state owned banks in the portfolio.

What is your take on the impact on the demand environment and currency fluctuations for IT exporters post the Brexit event?

Brexit is a unprecedented political event, and it is very difficult to assess the full impact. In the short run any political/economic uncertainties result slowdown in decision making and discretionary spending. BFSI space which is the biggest IT spender is likely to be shy of big investments during this period of uncertainty. Cross currency headwinds will challenge profitability. This may adversely impact our IT industry.

The National Sample Survey Office in its survey for 2014-15 (July-June) has indicated that the households spent the highest proportion their consumer discretionary expenditure on vehicles. In the backdrop of the Cabinet approval of the 7th Pay Commission recommendation what is your take on the auto sector and which are your top picks?

Directionally, the 7 pay commission payout will be favorable for consumption. However, we are less enthused about its impact on aggregate demand as compared to 6th Pay commission. It’s impact is likely to be about 1.2% of GDP over the next 2 years which is nearly half of what it was under 6 pay commission. The arrears are just for 3 months versus 3 yrs paid last time. This tempers our overall optimism on it spurring consumer spends in a big way. We remain selective in auto sector, and prefer 4 wheelers and few auto ancillaries.

Which are the other categories that could possibly from the pay hike of government employees?

We do believe that economic recovery would be consumption driven due to 7th pay commission, good monsoon, DBT, Govt. spending on infrastructure and spending in rural India. These improvements will benefit Consumer durables, Housing and related industries like paints, Consumer finance etc.

The monsoon is generally seen as a lean season for cement sector amid lack of demand. Surprisingly, cement prices are trending upwards and stocks are also seen outperforming. Are valuations looking stretched at current levels and what would be your strategy for stocks in the sector?

Cement sector has witnesses good demand recovery, price increases and lower energy prices in recent past making them a favorite on the street. Good monsoon this year after two bad years, coupled with 7th pay commission, govt. spending etc. does augur well for demand.

Monsoon is usually lean season for cement sector as construction activity slows down impacting demand. Hence price increase is usually taken before the demand slows down.    

Current valuations do appear stretched due to the recent sharp out performance. The sector may take breather with raw material and energy prices rising and lean activity during monsoons. We believe the cement will continue to witness demand recovery over the next few years. Also it is a sector focused on domestic revival and growth, insulated from global volatility. Hence every correction is a buying opportunity.

What is your take on metals space after global commodity prices stabilized as worries post the Brexit impact have eased?

Global demand continues to be weak, Brexit will add to the agony by adversely impacting global growth and commodity prices over short to medium term. Strengthening of US Dollar viz a viz Pound and Euro also impacts all commodities negatively. We remain negative on the sector. We believe that while metal prices may have made their bottom and recovered a little, but the stocks have run up significantly and now present a downside risk.

At this juncture, which are the sectors you will continue to avoid and why?

I worry about global volatility and sharp currency movements, and hence will like to avoid export driven sectors, Pharmaceutical, Information Technology etc.

What is your call on the valuations for midcap and small cap stocks at current levels? Which would be your top picks for a 3-year term horizon?

Indian economy is on the anvil of growth recovery. In an environment of declining interest rates and recovering economic growth, mid and small cap companies do well. Both in terms of faster earning growth as well as stock price performance. Hence well managed Mid and small cap companies can sustain the earnings growth and deliver good returns even from current levels. We prefer companies that have secular growth visibility and good management.