The cumulative cut of 50 bps by RBI at the start of the year gave a huge boost to the debt market. Given the perfect setting of most of the macro-economic indicators another 50 bps of rate cuts seem to be likely for the rest of the year.
S Naren
ICICI Prudential AMC
2015 has so far been driven by sentiment, alternating between optimism and anxiety; optimism, stemming from the economic prospects of the country and anxiety taking cues from global factors. The market has had quite a decent ascent in the short run, complemented by a positive rate cut from the RBI. On the flipside, global headwinds coming from Europe and US combined with richer domestic valuations should keep optimism in check.
A healthy consolidation will benefit markets
We expect 2015 to be volatile with reasonable uptick and some instances of downdrafts based on the local and global news.After the two good years that we have had in 2013 and 2014, it would be preferable for investor to moderate their expectations in check. It is of course impossible to predict the market, therefore investors should avoid being swayed by the past returns of the market.
The much talked about expectation is of US rate hike and the currency flutters occurring globally. It may be difficult for the US to have a higher interest rate environment, while the rest of the developed world is conducting some form of QE or another. Europe is on a bond buying spree, and so is Japan. This scenario itself is tantamount to tightening in the US.
But, just in case the US does decide to raise its rates in reaction to its strengthening economy, this is very likely to cause a wider impact on the global markets. This stance would lead to re-pricing of equities thus opening up opportunities across equity assets.
Indian economy set to spread wings
Going by the economic data, one can reasonably perceive an expanding Indian economy. Inflation and Current Account Deficit (CAD) are well under control. And the much anticipated reversal of interest rate cycle has just got underway. Given the lower crude price and lowering CAD, Indian equity markets offer a huge scope for investors.
Budget 2015 has gone further in reiterating its intentions of fiscal consolidation with a clear road map. The budget has also given a visibility to kick starting the capex cycle and infrastructure thrust. The government's finances are looking much healthier now with higher revenues and lower expenditure which is a very good combination for any government to have. Lower crude price has saved a few billion Dollars for the government in the form of reduced subsidies.
The attractive Debt fund opportunity
The cumulative cut of 50 bps by RBI at the start of the year gave a huge boost to the debt market. Debt funds have, as a result, returned above-average performance.The CAD, which is already well reined in, is likely to turn into a surplus in the coming quarters if the soft crude price stays. This has resulted in a huge savings of forex and helped the CAD tremendously in the recent past. Fortunately, inflation is already a percentage point below RBI target of 6%, aimed for the beginning of 2016. The disinflation in the global commodity prices has been a great boon for a consumer like India in terms of inflation. WPI too is in the negative territory at -2.0 percent in February 2015.
Given the perfect setting of most of the macro-economic indicators another 50 bps of rate cuts seem to be likely for the rest of the year. Investors holding relatively higher duration funds are likely to benefit immensely from this while more conservative investors can look at creating a debt portfolio with medium and long term funds.
Beneficial scenario for the leveraged sectors
The reversal of the interest rate scenario should come as a huge boost to highly leveraged companies. The 50 bps rate cut effected so far by RBI, when passed on to the broader economy, will reduce the interest burden of these companies. Some of these highly leveraged companies are well poised to make the most of the rate cycle reversal. However, it would require good diligence to spot the good companies in this basket. They are unlikely to have the best financials or balance sheets and research alone can unearth the worthy candidates. The financial sector too looks well placed to benefit from the lower interest rates.
Apart from improving credit demand, the NPA situation too is likely to improve. Public sector banks require capital infusion and this when combined with lower NPA and higher credit growth bodes well for the financials space. The infrastructure sector also looks to be a beneficiary of the increased government spending and recovery in the capex cycle.
To sign off
Good economic indicators aided by softening commodity prices place India in a sweet spot with regard to economic growth. Though Indian equities are not exactly cheap currently, they appear the most attractive emerging market for investors. The outlook for Indian equity is very positive for the next 3 to 5 years with even debt likely to join in with good performance, given the downward trend in interest rates.
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