| 'Correction phase, if any, would be transitory' | |
| Q&A/ Dr Carlos Asilis | | Vishal Chhabria / Mumbai September 28, 2009, 0:04 IST | |
Dr Carlos Asilis has held various positions and served well-known institutions and global companies including JP Morgan Chase (New York), Credit Suisse First Boston (New York), and the IMF.
Currently, as the chief equity strategist at Prabhudas Lilladher, he spoke to Vishal Chhabria on the trend in markets and its outlook among other things. Excerpts:
Markets across the world including India have run up quite a bit and too fast. Are they overheated or is there still steam left in the market?
The rally has been very fast and fierce. The direct answer to your latter question is I do think that even if we have a correction in very near term, there will be a lot of buying on dips on the part of institutional and retail investors globally, for Indian and global equities and they would recover and move higher between now and the end of the year.
Maybe not a lot higher but it (Indian market) should move close to the top end of the range, at current 5,000 levels. The risk is that markets will overshoot in the near term because a lot of investors, both retail and institutional, have missed the rally from March and many of them didn’t have a very good 2008. So, if we are to see a new correction phase in the next few weeks, it would be transitory and it wouldn’t mark a sustained decline.
So, our view of the Indian market today is that it is going to close the year at higher levels even though there is a significant probability of a pull back in the global equities in the near term, due to the dollar. If the dollar were to strengthen versus the euro, it would hit equities and India would participate in that correction. However, I think that ultimately a lot of investors would buy in those dips.
What kind of correction are you expecting?
On the S&P 500, it could be between 5-10 per cent. In the Indian context, it should be no more than the US. The additional risk in the India context is obviously RBI hiking interest rates. That would be a temporary effect ultimately again the markets would see buying emerging on dips. I am more concerned about the dollar than the RBI policy in the short term; the dollar is oversold now.
From the time perspective, when do you see the dollar appreciating?
I wish I knew exactly, but it’s always harder to say because there has been a very big role of the central banks in the forex market. But, if you were to ask me what is the timing for an adjustment I think it would be between now and end of November.
Typically, December is a bad period for the dollar so the chance for a correction is in the next 8-10 weeks. Maybe equities don’t come off that much even if the dollar strengthens, due to investors buying on dips.
In terms of liquidity we have again seen a lot of money chasing stocks and other asset classes. What is your view on that?
Yes, clearly there has been a lot of liquidity, courtesy of central banks. What is happening obviously in the developed world, interest rates are kept at a very low level because inflation is not an issue and there is so much unemployment.
So, since investors are not comfortable sitting on cash, interest rates are close to zero, they feel the urge of deploying those funds into high growth destinations and in the equities context, India of course is among the most attractive buys. So, from the flows perspective, the liquidity conditions are going to remain supportive of the Indian and emerging markets.
What is the average weightage of emerging markets in the institutional portfolio?
It varies; I would say that for those who are invested in emerging markets, it might be between 5 and 15 per cent. For India it would vary, but most will be about 10 per cent on an average. So we are talking about 10 per cent of 15 per cent, which will be 1.5 per cent of equities portfolio. And least favourable will be let’s say 5 per cent, so that would be 0.25 per cent of equities portfolio.
How much money is waiting to be deployed in emerging markets, particularly India?
There are funds that are non-dedicated that are going to buy in the emerging markets. So that’s potentially, I wouldn’t say infinite, but it is simply large, so a good chunk of it will go into India, I mean between 5-10 per cent. So I think in terms of emerging markets to the equities portfolio, potentially it could be maximum of 10 per cent of global equities. So it could be 0.5 per cent of between $10-15 trillion, it is a big number, over the next few years.
You have a 12-month target of 19,000 on the Sensex. What is the key thesis?
Now we feel that it may happen earlier but on the valuation basis again we think there is a chance of a correction. It is a conservative target, that graph should be little higher but given our concerns on the dollar and global markets and that markets are over bought short-term, we feel that there is no reason to push ourselves into more aggressive target at this time, we might do that later.
The reason for bullishness on India is that we see earnings growing by 20 per cent; it might be higher.
The reason for expecting 20 per cent growth has to do with our views on the macro economy and the cost efficiency that we are seeing in the important sectors, the decline in interest rates and cost of capital, which clearly benefit earnings. Commodity prices have come off, which benefit many sectors.
The question is what multiples should you slap on to that and we think 15.5 times (forward earnings) is very reasonable. Because if we are right about global macro view, growth markets like India should command a higher premium (anywhere between 15-20 per cent on a PE basis) versus the traditional developed markets. So again, that’s where our conservative projections come in.
If we are expecting the markets to go up which are the domestic sectors or themes which would actually work?
In the short term we are cautious because cyclicals look expensive than defensives, even though longer term we like cyclicals. We think we are going to get the opportunity to buy cyclicals at cheaper valuations. So, in the short term, we like healthcare and capital goods, consumer durables. We like telecoms and oil and gas.
The cyclicals, particularly metals and to a lesser extent reality, power and banks, look stretched. The markets are projecting a strong growth and we are not comfortable buying the sector at these valuation levels, also if the growth premium globally gets downgraded because of the dollar that could permeate especially cyclical sectors globally.
Recently, we have seen a lot of fund raising activity by Indian companies. Is the worst is over for India Inc in terms of leverage it had on its balance sheet?
What I read from what our analysts write is that maybe we are not completely back to the normal period but there has been a lot of improvement. The other point is that as in credit terms/spreads have come down, that even though the de-leveraging is not yet complete, it is less costly to hold to maintain or to sustain.
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