Rupee may depreciate by 2-3% per annum over next two years: LIC MF CIO

Between July-end 2017 and September 3rd week, we had seen Indian Rupee depreciated by 3.5 percent, and in next two years we may see Rupee depreciating another 2 to 3 percent per annum, Saravana Kumar, CIO, LIC Mutual Fund said in an exclusive interview with Kshitij Anand of Moneycontrol.

Q) The 1HFY18 is over and the S&P BSE Sensex rose just over 6% and for the year it has gained a little over 18%. Where do you markets headed in the next 6 months of FY18?

A) We are approaching markets with a positive view over medium-long term. Structural reforms, focused efforts on infrastructure creation, increasing disposable income along with favorable macro environment can be a highly potent combination of market performance.

Currently, implied multiples embedded in equity valuations is a short-term concern however as earnings delivery would commence, markets may get a much-needed comfort on valuations. In short, our view on the immediate term is cautious however we are quite optimistic in medium to long-term timeframe.

Q) What is your call on the rupee? Do you see it heading towards Rs70/USD in near term?

A) In last 10 years, we had witnessed natural depreciation in Indian Rupee of 3 % to 3.5 % per annum. On November 2016 Indian Rupee was trading against USD of 68.77 and in July 2017, Indian Rupee was trading against USD of 63.52.

That means Indian Rupee had appreciated 8% in that period. But, between July end 2017 and September 3rd week, we had seen Indian Rupee depreciated by 3.5%. Going forward in next two years period we may see, Rupee may depreciate by 2 % to 3 % per annum.

Q) Slipping macros is something which is troubling market participants at the current juncture. Do you think this will cap upside for Indian markets?

A) We do track macro variables, however, being bottom-up investors, we find individual investment ideas of much more relevance rather than macro variables.

On Macro Economic side - a blip for a quarter or two is something investors need not react to on immediate basis; however, one needs to be cautious with respect to change in trend or long-term direction.

We believe due to a mix of government reforms on various sectors – earnings would have an upward bias in foreseeable future, hence we are not much troubled with current macro variables and their quarterly gyrations.

Q) September quarter earnings will kick off from next month. Do you expect a recovery in earnings in this quarter?

A) There are multiple sectors which can deliver upside surprises in earnings. PSU banking is a large sector where earnings are depressed due to loan loss provisioning. Metals, Energy & Chemicals sectors have seen upward movement in underlying commodities.

Incremental negative delta on earnings from IT, Pharma sectors is likely to be limited. Upside surprises and limited downside drags may lead earnings to deliver growth from H2FY18 if not from this current quarter.

Q)  What is pushing foreign investors away from Indian markets? They sold about Rs11000 crore from Indian equity markets in September.

A) US FOMC (Federal Open Market committee) is expected to increase the reference rate by 25 bps before December 31, 2017. The US Government’s Balance sheet reduction by USD 5 Trillion is expected in a couple of years. So, Global Economists are predicting, US Treasury to hardened. Secondly, Global commodity prices also moving north direction.

So, the risk premium on the emerging market equity is likely to move up. That is the reason, we had seen Foreign investors are shifting the asset allocation from Emerging market.

At the same time, Indian Institutional Investors including MF are getting good inflow. Wef January 1, 2017, Indian Institutional investors had invested approx. USD 18.5 Billion (Rs.1,20,000 crores) into Indian equity market. The demonetization and GST will benefit the financial market.

Q) Top sectors which will lead next leg of the rally on India markets?

A) If one takes a bird’s eye view of the economy, Government is working round the clock to remove legal blockades and simplifying taxation. As we get infrastructure push and private capex cycle sees an uptick, investors would start to look at directional changes in earnings rather than immediate uptick. Such directional change in earnings trajectory can bring next level of portfolio performance.

Many sectors where valuations are reasonable and earnings upside risk is higher are the sectors which are likely to outperform. PSU Banking, Metals, Energy, Infrastructure are these sectors which we are quite positive on.

If the government enacts on the woes on telecom, then Telecom sector is also another one which has large potential.

Q) Morgan Stanley highlighted in a report that Sensex is on track to hit 100,000 in next 10 years powered by digitisation and $6 trillion economy at the same time. What are your views?

A) This is a possible scenario out of many likely outcomes. I do not want to comment on the specific scenario however on a broader scale – if geopolitical disturbance does not disrupt our progress then such figures are not out of reach.