India is the brightest spot in an otherwise gloomy global landscape, says Amit Rathi, managing director, Anand Rathi Financial Services. In an interview with Ashley Coutinho, he says he is bullish on Indian equities from a medium to long-term perspective but expects near-term headwinds. Edited excerpts:

India stands out against the gloomy global backdrop. This is our view of the strong macroeconomic situation with factors such as low inflation, low current account and range-bound government deficit, and improving corporate fundamentals (accelerating earnings growth, stable margins and reasonable valuations). So, I am optimistic about India’s equity market outlook for the next year. However, since these factors are often at loggerheads with more short-term events and factors such as liquidity, investor sentiments and fluctuations of high frequency data flows, my conviction on the outlook for the Indian market is much stronger for the medium (one-three years) and long-term (over three years) perspective.India was the fastest growing big economy in the world in 2015 and one of the global best performers in terms of inflation control over the past two years. The International Monetary Fund has projected India to be the fastest growing economy for each year between 2016 and 2020. India is also the new world topper in terms of foreign direct investment inflows. In addition, India is a rare emerging market economy that benefits from low commodity prices. ,So I can say India is the brightest spot in the otherwise gloomy global landscape.There are several risks. Being the world’s second largest economy and the fastest growing during 1993-2014, a serious slowdown in China is likely to depress global growth and trade, and exert deflationary pressures on commodity prices and manufactured products.Yet, with $3.3 trillion in forex reserves and a current account surplus, China is unlikely to face any major external sector problem. While capital outflows are likely to lead to the depreciation of Chinese currency (and, therefore, increased export competitiveness of Chinese products), this is unlikely to lead to any major global financial sector instability.We see considerable improvements. The exact growth rates depend on which index stocks one is considering with mid/small caps registering better performance than constituents of large-cap indices.

Yet, the big picture suggests zero top line growth aided by margin expansion and acceleration in profit growth. Excluding global cyclical sectors, the situation looks even better. It’s largely the domestic institutional players that supported the market last year. Do you expect this trend to continue in 2016? Portfolio allocation of Indian households in equity assets is extremely low and there is a huge concentration risk on real estate. In recent years, this is changing in two major ways. First, the equity allocation is increasing. Second, retail investors are increasingly investing in the equity market through collective investment schemes, most notably mutual funds, rather than putting money directly into the equity market. I expect both to continue. Unlike in the past, equity schemes of mutual funds have not faced generalised redemption pressures despite correction in the equity market in the past year. This shows increasing understanding of Indian retail investors about the long-term wealth creating nature of the equity market. Which sectors are you bullish on? I like most companies dependent primarily on India’s domestic consumption. While at least part of the consumer demand for goods can be met by imports, this is virtually impossible for most segments of consumer services. Therefore, fundamentally we prefer B2C service companies over B2C goods companies, unless there are strong tariff barriers. So, we like segments such as domestic-oriented pharmaceuticals, durables (including automobiles), food processing, food services, education, entertainment, health care services, hospitality, logistics and passenger transportation. While we do not expect strong manufacturing capex, at least in the next four quarters, we expect a pick-up in infra capex, especially in defence, roads, railways, urban infrastructure (mass transportation and sanitation). We like companies in these segments, not the asset owners, but executors of these projects. By the same logic, we are positive on cement.