Next 3-5 years, switch a part of your gold investment to equity
Prashant Jain, HDFC MF
Oct 21, 2016 | Source: ET Now
Markets have lagged economic growth for fairly long periods of time, the market cap to GDP ratio is sitting at nearly 10-year lows. But all that is set to change.
The earnings momentum should now shift towards corporate banks both in the public and the private sector. Metals sector should do very well in terms of numbers and the engineering and construction space should start recovering. The earnings growth may be below expectations in the consumer and the pharma space.
On Corporate Banks: We had always said that corporate lending in India is secured lending and the value of the assets that have been created is not going down in a growing economy. Therefore, these corporate were cash poor but asset rich. The loss ratios in such lending are not very high. The loans become NPAs on a classification basis for some period, but over time they tend to be upgraded and this is what will happen.
The borrowers, leveraged companies will benefit as the interest rates come down. Even the banks will benefit because the NIM of banks is relatively stable in different interest rate regimes but the treasury gains of the banks will be very significant. In our assessment, every one per cent fall in 10-year yields creates on the book gain of more than one lakh crores for the entire banking system.
Corporate bank is a more appropriate word than wholesale bank because all these banks have a great underlying deposit franchise and the lowest cost of funds and therefore they are- retail banks when it comes to raising deposits and they have lent these to corporate. With every passing year now we should see the ROEs of these banks improving. By fiscal 2018 -19, we should see fairly normalized levels of profitability for these banks.
On Indian Pharma Co.s: The market share of Indian generic companies in US has become pretty sizable and on that base it is very hard to deliver meaningful growth because the US generics market itself is not growing. But there could be individual companies which may do something different, something innovative that they could grow. At a broader level, growth will be challenged. The second factor which drove earnings in this sector for last three years was a sharp depreciation in currency. With current account deficit at nearly zero with very healthy FII and FDI inflows, the currency should be stable in the foreseeable future so that tailwind of currency depreciation is also not available.
On market valuations & Gold: When we say markets have run up it is true for the last one year but if you look at the last eight years, markets have done nothing. Markets have lagged economic growth for fairly long periods of time; the market cap to GDP of India is sitting at nearly 10-year lows. It is true that the profit growth has been weak for the last two years but that is all set to change and in the next two, three years we should see fairly robust earnings growth.
Gold delivers returns which are close to inflation and equities deliver returns which are significantly more than inflation. The returns from both gold and equities are volatile, they are not fixed. If you could invest a large part in equities and you have a similar time horizon, both give you volatile returns but over longer periods equities give you meaningfully higher returns compared to gold. So I think there is lot of sense in making a switch from Gold to equities.