Slowdown cyclical rather than structural: Abakkus Asset Manager Founder

The market’s mood has been quite sombre, especially in the mid- and small-cap segments, which have seen sharp corrections over the past 18 months, says Singhania

Sunil Singhania wants govt-backed action to re-ignite animal spirits and kickstart the economy. In an Q&A with Ashley Coutinho, he says the sharp fall in stocks has made some attractive. Excerpts:

1. The markets have been volatile for the past year and a half. What is the outlook for the year ahead?

The mood has been quite sombre, especially in the mid- and small-cap segments, which have seen sharp corrections over the past 18 months. The headline indices of Nifty and Sensex held on with resilience before giving in during the month of July. This was in sharp contrast to global markets that were quite resilient. International Monetary Fund lowering India’s growth outlook, weak trends for corporate quarterly results, budget proposals for higher marginal tax rates for individuals and trusts contributed to the nervous sentiments. Regular negative news flows of ratings downgrades and liquidity issues faced by a few non-banking finance companies and corporates added to the already weak sentiment.

Quarterly results have been sombre with consumption stocks reflecting a general slowdown. In our view, this seems more cyclical rather than structural in nature. We need government supported actions to reignite the animal spirits to kick-start the economy and bring back the confidence.

2. What are the positives?

The macros continue to remain stable. The Indian rupee has been stable except for the recent fall post Chinese yuan depreciation, inflation continues to be soft and fiscal prudence continues to be maintained. 10-year g-secs have fallen to lows of 6.4 per cent and excess liquidity with the central bank is now almost Rs 1.5 trillion. Crude has already correctly sharply to $57 per barrel and looks set for more correction, which would turn out to be a big positive for the Indian economy.

After a delayed onset, the monsoon covered the entire country by mid-July. The overall monsoon rainfall deficit has now come down to 6 per cent from 30 per cent last month. Good rains along with increase in farm procurement prices should aid the rural segment.

The falling interest rates, enhanced government spending and the onset of the festive season will help boost economic growth.

The sharp fall in stock prices has made quite a few stocks attractive.

3. How have you positioned your portfolio for this year?

We have been cautious and gradual in our approach in deployment of the funds that we have raised over the last one year. We are predominantly following a bottom up approach to investing and hence individual stock fundamentals rather than sectoral view play a major role in the deployment strategy. We do like consumption but the discretionary space rather than staples. Select IT and pharma should do well as there would be decent growth and some amount of currency tailwind.

4. Since you track financials closely where do you find opportunities? Can PSBs be looked at right now?

We like non-fund-based financials and especially insurance as a space which is still highly under-penetrated. We also like select corporate banks where large part of the NPA pressure is probably behind us and with interest rates being low; should do well. Niche NBFCs predominantly in retail lending with no asset liability mismatch is something we prefer.

5. June quarter results have failed to enthuse the markets. What are your key takeaways? Any possibility of the earnings growth picking up in the coming quarters?

Results have been mixed. Though there have been quite a few disappointments, the markets were already braced for this. Some pockets like corporate banks, a few IT companies, large FMCG companies and select engineering companies have reported better than expected numbers. While the September quarter will be one of consolidation, our view is that with falling interest rates leading to demand returning, festive season led demand and also rural demand due to good monsoon and higher crop prices should lead to a much better December quarter. Huge government spending, as indicated by the higher outlay in the Union budget, should further lead to visible green shoots in the economy.

6. FPIs have been heavy sellers in the last month or so. Do you expect the trend to continue?

We were seeing good flows into the country till June. A substantial part of the huge outflows seen since July have been due to tax confusion as proposed in the budget. The finance minister has already announced that they are open to understanding the FPI concerns and work on possible solutions. With huge global liquidity and long-term outlook on India remaining positive, we expect the trend in FPI flows to turn to the positive soon. Inflows from foreign investors through the FDI route have remained very strong even during this period.

7. The surcharge hike will impact category-3 AIFs. How will it impact inflows in long-short funds?

The surcharge hike has had an impact on the long-short funds where the increase in marginal tax rate is very sharp. However, we are a long only fund and capital gains apply to us. Over here, the increase in tax rate is about 2 per cent for long term and about 4 per cent for the short term. This we believe will have, at worst, a marginal impact. With the investment flexibility and operational benefits that the category III AIF platform provides to the investment manager, we are in a good position to try to negate the same by slightly higher returns.

8. What is your advice to investors at this point in time?

These are turbulent times for Indian equities especially sentiment for the small caps and mid caps is the worst in a long time. However, history has proven that such times are in fact the best times to create a portfolio and invest. At the same time, we believe that the economy will take a quarter or two to get back on its growth trajectory. There is no denying the fact that as an economy, India does have the potential to reach $6-7 trillion in GDP over the next 10-12 years. Stocks have corrected more than the fundamentals justify and are now at prices that we would have never imagined a year back. We would advise investors to make use of this opportunity and investor over the next 3-4 months.