Birla Sun Life MF sees rupee touching 70/$1 by end FY17

By Anshika Kayastha and Pranitha A.

MUMBAI: Depreciating steadily at a rate of about 3 rupees per year, the Indian currency is seen touching 66.5-67 rupees per dollar by Mar 31, 2016 and 70 rupees by Mar 31, 2017, according to Maneesh Dangi, co-chief investment officer, Birla Sun Life Asset Management Co.

Despite the recent volatility and a “sustained depreciation at a run-rate of about 5-6% annual and 0.5% every month”, he expects a more linear movement in the currency hereon.

“These things will happen because there are global headwinds. The currency is essentially the equity of a country and the rupee has actually appreciated than depreciated vis-a-vis other currencies. It’s actually done well, so this correction is actually good for the country. It’s a stimulus,” Dangi said.

Concurring with his view, Mahesh Patil, co-chief investment officer of the asset management company, said the rupee’s depreciation against the dollar was warranted given its sharp appreciation against other currencies.

“…there were capital flows that were coming in, a lot of money was coming in, rupee was strong. So the rupee will depreciate a bit. It won’t be a sharp depreciation but it could depreciate another 3-4% over the next one year…is something that we should factor in,” he said.

According to Patil, a calibrated depreciation in the rupee is not expected to pose a risk to domestic equities either, because in the absence of volatility other factors such as competitiveness and product pipeline would play a more important role for currency sensitive sectors such as information technology and pharmaceuticals.

INVESTMENT OUTLOOK

Dangi expects a growth rate of about 7.5% and an earnings growth of 15-20% in the coming few years, based on the belief that the large correction is already behind us, and that India is “in for a good time now”.

Assuming an earnings-per-share growth of about 18% in domestic equities, and currency depreciation of about 4% a year, he expects guaranteed returns of about 12-13% for the next five to ten years, translating into “a huge dollar return”.

Terming India the “cleanest emerging market”, Dangi emphasised his strong belief in the India growth story comparing it to countries such as Indonesia where economy recovery started around the same time, but the country has not been able to push reforms the way India has.

“People are disenchanted with them, the currency has misbehaved, now the equity is not doing well there. Reassessment for India too has happened but I think India is a lot more realistic, investors are more realistic,” he said, adding the equity market rally of 2014 was definitely not speculative.

“If it was a speculative rally, then you should be expecting another 30-40% correction, which none of us are. We think it’s got fundamental feed to it and things will sequentially continue to improve in the next many many quarters,” he said.

The rally that began ahead of the general elections and continued with the formation of the Modi government in 2014, took the National Stock Exchange’s Nifty from levels of 6709.95 in the beginning of May 2014 to a lifetime high of 9119.20 in March 2015 from which it has fallen 8.3% to 8365.65 now.

While Patil declined to peg the Nifty level a year from now, he said he expects returns of “at least 15%, compounded” from the 50-share benchmark index over the next two to three years.

“It’s been consolidating for the last six months. So I think the market is now looking for some positive news or triggers what will come in …and that’s where the market should again start to do well. Or otherwise, there could be more correction, some 4-5%, then you could see a bounce back,” Patil said.

FUND HOUSE STRATEGY

Encouraged by the improving macro-economic environment and with a long-term investment view on the country, the fund house has added 66 new mid-cap stocks to bring its portfolio universe to a total of 383 stocks.

“Two-three years back, the market was seeing only few stocks, large caps. Now, with broader participation in the market, broader interest coming in, the breadth of the market has improved. So you need to have more stocks to look at and also as you get more comfortable on the long-term picture, you’re comfortable owning even some of the mid-caps because you expect things to look better, or expect things will improve,” Patil said, adding he remains bullish on mid-cap stocks across sectors.

Particularly positive on companies in the consumer discretionary and capital goods sectors, Patil said they have also increased exposure to construction companies, especially those in the mid-cap segment, which earlier they were completely negative on.

Although the industry has seen a fair bit of churning to capital-intensive cyclical stocks from defensive sectors, due to under-performance by and correction in the latter, Patil believes that most fund houses are relatively well balanced at this point in time.

“Defensives are also pretty expensive, even the other cyclicals are also reasonably priced. So there is no reason to make any big shifts. This will be a year where you look at stock-specific rather than large sectoral allocations, big allocations,” he said.

The optimism regarding the economic recovery though, does not extend to the corporate bond market for Birla Sun Life Mutual Fund. The managers prefer gilts over corporate bonds wherever possible, but due to the large investor corpus in shorter tenure bond funds, have been forced to take a significant exposure to the category.

“We don’t like corporate bonds, just don’t like them. We have to own them but we don’t like them, especially the 5-10 year bonds. We’d rather invest in 1-3 yr bonds and that’s where we focus now. In the shorter-end, most of the exposure is being taken through corporate bonds,” he said.

His bias for the one-to-three year segment is because the “shorter-end is more of a liquidity trade”. With the repo rate expected to be closer to around 7% on an average over the next three years, 8.5% yield on corporate bonds is a “decent carry”, he said.

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