Expect 10-12% compounding returns for next 3-5 years

Big talking point, political instability in U.S affecting global markets: It is difficult to sit here in India and make comments and observations as an expert on US politics. What is happening in India is that domestic economy is going to do better and that is getting. If there is political uncertainty outside India whether it is US or any country, the reality is that India’s political stability, policy clarity and domestic growth is coming to the fore. The focus has to be on domestic stories, on domestic consumption, domestic banks and I would also say that sectors will broaden as this rally proceeds through the rest of this year.

We expect strong consumption to come through on the back of good monsoon and that will give an impetus to autos, to motorcycles. The investment cycle will also pick up. We have seen the first beginnings of that in the commentary and the analyst meet held by some of the companies. The domestic story is where to focus on and what happens in the US is important but the big story in India is that India is where we need to place our bets.

Some would argue that earnings recovery may be coming but markets have already run up in anticipation of an earnings recovery. When the actual recovery kicks in, markets will say look we knew this was coming? That would be absolutely true if we see a very short earnings recovery. Of course, there will be commentators who will say that earnings recovery will not happen. There is still an element of doubt and there are commentators who will say something on the lines of which you just said. Is that priced in and therefore is it already up? You are paying for it and there is another view that we are on a slightly longer term trajectory of strong earnings growth which is where we would be and that is why we would see every opportunity and every dip in the market as an opportunity to buy. It does not mean they go out and buy anything. It does not mean go out and buy the broad market without looking at your numbers and valuations, it only means be selective and be focused on India domestic story.

We are in a strong phase which will continue for may be another three to five years and in that context the market definitely is not expensive but the widening of sectors will also happen. We like some of the capex names coming through.

Where do you think this market could be a year from now? I would have a base case compounding of at least 10% and that is where the earnings trajectory should be. It could be even higher than that depending upon what happens in the global environment but 10% to 12% compounding from here onwards for the next three to five years, is a safe assumption.

Which end of the domestic recovery are you bullish on? We are bullish on domestic consumption. We are bullish on the domestic capex cycle picking up. Incrementally, it will be higher government spending both at the central and the state level but it will eventually quickly broaden out by 2019. It should broaden out with major industrial capex coming in selective sectors.

How do you approach the laggards of the recent past that is IT and pharmaceuticals? I would still be cautious of the exports sectors. I would evaluate those sectors post September.

In the event of any global liquidity event what happens to our markets? My view here is that yes liquidity is essential and if it comes off, then it will be a good opportunity to buy because a lot of strong domestic names are now going to step up in terms of earnings growth and these will be available cheaper. I do not think the fundamental and the structural drivers which have been put in place in the last 12 to 24 months are going away in a hurry. We took a lot of time. We have had years and we have sweated while earnings growth did not come through and now that the building blocks are in place and the train has started to move away from the station, it is time to board the train and continue this investment journey rather than keep questioning whether anything is going to happen. So, yes liquidity event can happen; Yes, it will take the markets down but it will be an opportunity to invest.