NAVIGATING VOLATILE MARKETS
1. Why have the markets been so sporadic in recent times?
Ans. Indian equities have witnessed some volatility since the start of the year, mainly driven by global cues. Nervousness around Greece along with the stronger than expected data in the US have raised expectations of an earlier-than-expected rate hike by the Fed. A rate hike will result in money flow into US dollar assets, which will likely impact global currency and equity markets. The euro has already touched a 12 year low vs. the US dollar. Domestically, Q3 FY2015 earnings were below estimates. We believe that investors should consider buying Indian equities at every dip. The Budget 2015-16 was pragmatic and growth oriented. Revival in the investment cycle, pro-cyclical measures by the new government, low inflation and further possible rate cuts by the RBI will help boost economic activity, which will eventually reflect in corporate earnings. We remain optimistic that corporate earnings will exhibit strong growth in FY16 and FY17.
2. What advice should advisors give to new and existing customers for Equity investments from a short term perspective?
Ans. Investors having an investment horizon of more than 1-2 years should use any market correction to buy Indian equities. With the government’s focus on reviving the investment cycle, we expect GDP growth to accelerate from here on, which should bode well for equities. Higher investments by the government would lead to job creation, which in turn would spur higher savings, consumption and investments, thereby creating a virtuous cycle. Short term investors should ideally stick to the systematic investment plan (SIP) route of investments as markets may continue to be volatile in the near term largely due to global factors.
3. What are the local/global risks that we foresee that could lead to high volatility in the market? Where do we see the Sensex and Nifty at the end of 2015 and 2016?
Ans. Higher interest rates in the US will remain as the near term risk for global equity and forex markets. However, we believe that since most investors are expecting a rate hike by the Fed, it is priced in to a large extent and hence the market impact may not be that significant. The other risk pertains to crude oil prices. Any spike in crude oil prices will impact India as we import around 80% of our oil demand. With a strong government at the center and improving macro economic variables, India remains one of the fastest growing economies in the world today.
4. Is the oil, inflation, dollar sustainable at current levels?
Ans. After correcting over 50% since the June 2014 highs, crude oil prices have bounced back most recently, despite no real change in fundamentals (supply). Saudi Arabia has maintained its production output despite a fall in prices, which has further dampened prices. The US dollar has strengthened against most of the global currencies on the back of improving macros and the job market. Commodities have also corrected due to their inverse correlation vs. US dollar.
5. Is this a lump sum or a SIP market? And what are our favorite sectors/ caps to invest in?
Ans. Investors having an investment horizon of more than 2 years could adopt a lumpsum strategy to invest in equities while investors with a investment horizon of less than 2 years could opt for a SIP strategy. We have an overweight position on financials, consumer discretionary, capital goods/industrials and materials along with oil marketing companies. We remain cautious on consumer staples.
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