Greece’s rating downgrade and probe against Goldman Sachs are impacting domestic equity markets. However, good corporate earnings are providing cushion. Gopal Agrawal, head (equity) at Mirae Asset Global Investment Management (India) Pvt Ltd, tells Chandan Kishore Kant the markets need not worry much as these global issues will only lead to short-term reactions. Excerpts:
How do you see capital markets performing this year?
This year, I believe, is the year of stocks. The macro trade has already been played. Within sectors, there will be huge differences in performance of different stocks. Companies with strong balance sheets and good visibility in earnings will outperform. Confidence is building up in the economy as well as in the capital markets. Mid-caps were earlier trading at a discount of 25-30 per cent against large caps. The gap is narrowing. The earnings trajectory in mid-caps is very strong and we can see these outperforming large-caps in 2010.
Should the markets be cautious about issues like Greece and Goldman Sachs?
Countries like Greece and Portugal are under trouble and China is tightening its monetary policy. But the markets should not worry too much as the entire risk is being passed on to federal governments. Globally, most balance sheets now have too much debt. The debt-to-GDP (gross domestic product) ratio has crossed 100 per cent in many countries. It means the government has given companies a chance to de-leverage their balance sheets and let the economy move. It is a calculated gamble which has been taken across the globe. Till date, we are seeing some positive signs, but we have not reached a very significantly higher level. Though industrial production has started to rise, recovery is still not very strong. Positively, though, data points in the last two months have been very encouraging.
The markets look fairly valued at current levels. What will be the next trigger?
What will trigger the next movement will be corporate capex programmes. When corporate capex starts, sectors such as capital goods and engineering do well. This will also lead to an increase in tax collections. Till that time, there will be consolidation.
Which sectors you are bullish on?
At this point in time, we are bullish on capital goods and infrastructure. On pharmaceuticals, too, we are very positive in terms of absolute performance. And, to hedge ourselves, we have allocations towards FMCG (fast moving consumer goods) and IT (information technology) sectors. This is because IT companies has delivered good numbers and also because any eventuality in the western world will make currency movements favourable for IT companies.
Which sectors would you like to avoid?
We have recently gone underweight on global commodities. The BSE metal index has outperformed. Metal stocks have performed very well, though we think, after some corrections, there will be some bounce-back. We have been underweight on telecom because competitive intensity has increased. Further, 3G will strain balance sheets of companies in the short term, which is making us a little uncomfortable.
What are your expectations on corporate earnings growth in the coming quarters?
Urban centres have started contributing to growth. The demand from the rural side is strong and urban centres should do well because of salary hikes. We believe there will be a 22 per cent earnings growth in 2010-11 across the board.
What are the serious challenges for growth in India?
Crude oil is a big concern. If it goes beyond $90 a barrel, we will have a big macro challenge. It will hit sectors across the board.