Mr. Pradeep Gokhale

In an interview with Capital Market, Pradeep Gokhale, Senior Fund Manager, Tata Mutual Fund said, For equity markets the transmission of RBI rate cuts into lending rate cuts is more important. We feel this transmission will gather speed during the year which will be a positive driver of earnings.

Excerpts:

1. The equity markets are turning volatile? What will the key driving factors for markets going ahead?

After a very strong rise in Indian equity markets since the lows of August 2013, some increase in volatility is to be expected. So in the near term global issues such as possibility of Greek default, some increase in oil prices from the lows seen in January 2015, issues relating to FII taxation as also a weak earnings season in India has led to increase in volatility. Also, India is a consensus overweight market for FIIs. So from a three month perspective we may see higher volatility but such factors have only a transient impact. Over the medium term, markets respond only to earnings and earnings growth.

2. How are the market positioned to face global clues in terms of US rate hike?

I think the experts are still debating if and when US will hike interest rates. The good part is that with more discussions on this topic, market participants are already aware of the possibility and it starts getting factored in valuations. Also, India today is significantly better prepared to face the rise in US interest rates today than we were in 2013. Our current account deficit has fallen significantly from close to 5% of GDP then to slightly higher than 1% today. The dependence of external funding is thus much lower. So India is in much better position to face the US rate hike.

3. Which sectors you are considering attractive from investment point of view and why and which sectors you are avoiding and why? What kind of stocks never enters your portfolio?

We expect Indian economic growth and corporate earnings to improve over the medium term. Hence we have higher allocation to sectors that are likely to benefit from this. We also feel that the stock selection will be more critical for generating the excess returns than merely sector allocation. Our view is that within a sector, those companies with management bandwidth and financial strength will be able to benefit more from the improved macro fundamentals and the improved sector prospects.

Thus our key overweight sectors are

' Cement and capital goods - which will benefit from the coming capex cycle. Within capital goods we are more positive on sectors such as logistics and transportation, defence manufacturing, urban infrastructure and transmission and distribution sector

' Auto and auto ancillaries and select consumer discretionary stocks which will benefit due to improved personal income growth

' Pharmaceuticals - where both the key markets US and India has good growth opportunities.

We are neutral on banking and IT sector. We remain underweight on oil and gas and metals and mining due to weakness in global commodities. We are also underweight FMCG stocks due to high valuations.

4. When do you expect the RBI to further cut rates?

We feel the trajectory of interest rates would be down for 2015. Our fixed income team expects RBI to cut rates by 25 bps in June. But for equity markets the transmission of RBI rate cuts into lending rate cuts is more important. We feel this transmission will gather speed during the year which will be a positive driver of earnings.

5. What would you like to advice to the investors in the current scenario?

We are positive on the equity markets over the next three years. We expect corporate earnings to improve and India's valuations are reasonable and at long term averages. Thus investors should systematically invest in the equities and use any volatility in the market to increase exposure.

Powered by Capital Market - Live News