'Fund managers have turned bullish with economic indicators improving'

Chintan Haria, Fund Manager at ICICI Prudential Mutual Fund, was fully invested in equities by the end of February on expectations of a bull run. As the market touched new highs in March, he took some profit and pared his portfolio to 90 per cent, as he felt the rise was faster than expected and it was better to sit on some cash ahead of the April-May general elections. Still, he is optimistic about Indian equities and believes the worst seems to be over for the economy. "GDP [gross domestic product] growth has bottomed out, inflation has peaked and the fiscal deficit is the talk of the past," he says.

Another major factor for fund managers such as Haria turning bullish on equities in the past three months is the expectation that the Bharatiya Janata Party-led National Democratic Alliance (NDA) will come to power at the Centre after the elections. The mood has changed as market players, who earlier expected a fractured mandate in the polls, now believe a stable government will be formed. This confidence is reflected in the fifth edition of the Business Today Morningstar Asset Allocation Survey of fund managers. The survey shows no fund manager expects the Bombay Stock Exchange's benchmark Sensex to fall below the 21,000 level by the end of March 2015. The Sensex closed at 22,628.84 on April 17, a day before this magazine was sent to press.

The survey shows 60 per cent of those polled expect the Sensex to trade between 23,000 and 25,000, and 30 per cent feel it could top 25,000 in the next one year. This is a dramatic change from the survey's third edition in October when only 15 per cent fund managers expected the Sensex to cross 20,000 and from the fourth round in February when 45 per cent predicted a level above 23,000.

In the latest survey, all fund managers expect a sustained rise in foreign inflows. However, if there isn't a favourable outcome from the election or if there is a fractured mandate, a majority 92 per cent of the fund managers see the equity market tumbling. "One can't predict the outcome of the election, but the entire herd expects the NDA to come to power. Any disappointment will see a minimum 15 per cent fall in the Sensex," says Haria.

The survey showed that, while fund managers are confident about the Sensex scaling new peaks, they aren't ready to take more exposure to mid- and small-cap stocks. No fund manager wants to invest more than half of the portfolio in mid- and small-cap stocks, compared with 27 per cent in the previous survey.

Despite the sharp rise in the Sensex in the past few months, valuations seem compelling to fund managers, with 58 per cent of them expecting the index's price-to-earnings ratio, an indicator used for valuing stocks, to hover between 14 and 16 times forward earnings over the next one year. A quarter of those polled expect the ratio to be between 16 and 18 times forward earnings. Apart from shares, fund managers are looking to take more risks in the debt market. The survey showed that half of those polled expect to increase their exposure to lower-rated debt in the coming year while the other half want to hold on to their lower-rated paper.

The survey also shows that fund managers expect the economic situation to improve. GDP is likely to grow at 5.5 per cent to six per cent, feel 42 per cent of the respondents. Only 18 per cent expected GDP growth to touch this level in the previous survey. Half the fund managers project GDP growth between five per cent and 5.5 per cent.

Similarly, fund managers believe inflation will stabilise in the coming year. Of those polled, 42 per cent expect inflation based on the wholesale price index (WPI) hovering between four per cent and five per cent while 50 per cent see the consumer price index (CPI) between seven per cent and eight per cent. WPI inflation was 5.7 per cent in March while CPI stood at 8.31 per cent, latest government data show.

Despite an improvement in the macro environment, a majority of fund managers do not expect the Reserve Bank of India (RBI) to sharply cut interest rates in the next one year. Nearly three-fourths of the respondents expect the repo rate - at which banks borrow from the RBI - to be in a range of 7.5 per cent to eight per cent, unlike the previous survey where 55 per cent expected the rate to hover between seven per cent and 7.5 per cent. A few fund managers (18 per cent) expect the repo rate to rise a tad and stay in the eight per cent to 8.5 per cent range in the coming year. On April 1, the RBI kept the repo rate unchanged at eight per cent in its monetary policy review.

The survey shows more fund managers than before expect the rupee to appreciate. Half of those polled predict the rupee to trade around 60 to 62 to a dollar over the next one year while 42 per cent expect it to strengthen and hover between 58 and 60. Only eight per cent feel the rupee will weaken to trade between 62 and 64 against the dollar in the coming year, compared with 45 per cent in the previous survey. The rupee is currently trading around 60 versus the dollar.

The view on crude oil prices hasn't changed much among fund managers. Like the last survey, more than half the fund managers expect crude oil prices around $100 to $110 a barrel. More than a third (36 per cent) expect oil prices to trade in a range of $90 to $100 a barrel while nine per cent predict a fall below $90 over the next one year. Similarly, the view on gold hasn't changed much with 36 per cent looking to sell gold and only nine per cent in favour of buying the yellow metal.