Expect bull run in 2014, cyclicals may outperform: DSP Blackrock

Indian stock markets are likely to witness a new bull run towards the end of the current calendar year 2014, S Nagnath, president and CIO of DSP Blackrock said. Stock prices will multiply and there will be new leaders in the market, he added. As a result, cyclicals and infra stocks will outperform at the cost of tech, phamra and defensives, Mr Nagnath says. His prediction is predicated on hopes of a recovery in economic growth in the second half of this year. (Watch the interview)

Here is the edited transcript:

Are we on the cusp of a bull market?

The first six months of the year will be choppy and volatile and could see some correction but second half of the year onwards, and for the next 2/3 years, we ought to see economic growth pick-up momentum and corporate earnings growth to improve. Both of these will underpin strong performance by equities during this time period.

But will there be a new bull market?

Even the markets break out into a new high. What will happen is that markets tend to move up much more. So I do expect to see a new bull market commence sometime later this year, but more intently in 2015 and 2016.

A bull market, where prices multiply?

We had a range bound market in the late nineties and then we broke out into a new high in 2003 and 2004 and that just did not stop at few 100 away from the old high. We moved up much higher. Somewhat akin to that trend is what I see happening over the next 2-3 years.

How much of this view in contingent on favourable election results?

I just feel confident that economic growth is close to bottoming out and we should see better than 5 per cent GDP growth rate in 2015 fiscal, and 6-7 per cent rate in fiscal 2015-16 and 2016-17. This should contribute to 15-20 per cent rate of growth on corporate earnings in fiscal FY16 and FY17. If you see this happening consistently year after year PE (price earnings) multiples will also begin to expand. We have always traded between 10 and 20 PE, and now we are at about 14-times forward PE and this can move to 17/18 PE over a 2-3 year period as earnings growth pick up. So if you do the arithmetic it does point to a much higher index over a 3 year period.

What is economic recovery predicted on?

I could be wrong, but it's predicated on fact that capex cycle should begin to pick up momentum. A lot of project clearances have happened and after the election the second half of the year will see implementation of these projects. Inflation is now starting to moderate, interest rates may start declining later in the year. Also the crude oil prices over a medium term they ought to moderate again. So we will have a confluence of positive factors that will lift sentiment and economic growth rate. This in turn will keep investment cycle moving forward and all of these will contribute to better environment for equities.

How big is inflation as a factor in 2014?

It may be one of the important factors. We have also to look at pace of Federal Reserve tapering which will also be contributory to market sentiment. As we get into the second half of the year, the focus of investors will be on domestic factors.

What about interest rates?

I don't see rates changing from where they are now either up or down. And any decline in rates will only happen at the end of this year.

What is your view on banks?

Non-performing assets (NPAs) concerns have been around for some time, and by or large they are priced in. But by the second half of the year, this concern will begin to disappear as investors begin to focus on the positive momentum of banking sector in context of growth in the economy.

What sectors will drive the next bull market?

Revival of the capex cycle would mean that the infrastructure sector, capital goods sector, engineering, metal sector, cyclicals which have not been so much in favour ought to come back into focus.

Which sector will outperform?

Banking, by the virtue of having the highest weightage in most indices, will continue to be a leader.

What about IT and Pharma?

IT and pharma could continue to gain in the first half but pace of gains may be more muted as compared to 2013. But if growth picks up in second half, it will be the cyclicals and infrastructure that will be much better. By the end of the year, some of the cyclicals sectors might have done better than some of the defensive sectors, provided growth picks up.

What is your view on consumer staples?

Long term, they are good but near term, they have done well and appear little expensive so they could relative underperformers compared to tech and pharma.

Tell us about the fund that have you newly launched?

The back tested results have been very good over a 3-10 year period, so investors who have a medium to long term investment horizon, preferably 2 years or more, can look at a product like this. Even though markets may be volatile in short-term but as economic growth momentum begins to pick-up, equity markets will do very well this year and beyond. The key issue is that there will always be some market volatility and this product tries to minimize the decline during the down turn and at the same time tries to be as much in equities whenever there is potential for uptrend.

Is it a good time to invest in government benchmark bond?

I will take a broader view of the entire year; rates may remain where they are and trend down later in the year as inflation begins to moderate. So inflation and rates will be more or less range bound for the first 6-9 months of the year. Significant decline in rates are expected at the end of the year. Within this period you can have bond prices moving up and down but broader trend will be when rates come off during the end of the year and not before that.