Revival in capex, govt spends key catalyst for markets: Gopal Agrawal

Q&A with Chief Investment Officer, Mirae Asset Global Investments (India)

In an interview with Sheetal Agarwal, Gopal Agrawal, Chief Investment Officer, Mirae Asset Global Investments (India) says that he expects Sensex earnings to grow by 12% in FY14. He remains positive on consumption and exports driven sectors. Edited Excerpts:

What is your outlook on markets?

Markets have remained sideways and certain pockets of markets are under-performing significantly. Government's drive to contain the fiscal deficit has led to reduction in planned expenditure by close to Rs 90,000 crore. This has led to some slowdown in our economy, which is reflected in our GDP number also. Also, liquidity is really tight in the Indian markets. However, we are seeing some good trends on the macroeconomic front such as falling wholesale price index.

Secondly, because of improvement in US economy, gold imports in India will come down over a period of time and barring Iran issues, the oil prices are likely to remain range-bound. The worst of the current account deficit of about $195 billion will reduce to $175-180 billion dollars. All this will have a positive impact. How the market will move from here will be decided more by the government releasing money for Planned expenditure, releasing subsidy to normalize liquidity in the market.

That will be the key trigger for the markets because the valuations have come to a very comfortable zone.

What are your earnings expectations for the March 2013 quarter? Are the earnings downgrades over?

We are expecting flat earnings growth for the March 2013 quarter. Global cyclicals will see a severe beating this time along-with some names in the infrastructure and auto sectors which will have moderate growth. But the heartening part would be that overall operating margins would be slightly better, given the softening input prices.

Earnings downgrade cycle is not over yet. When we started the year, we were expecting Rs 1,480 earnings for FY14 and Rs 1,350 for FY13. I think we will be ending close to 1,200 earnings for FY13 and expect around 12% earnings growth for FY14 rather than 18-19% expected earlier.

What strategy will you adopt in these markets?

The governments worldwide are facing shortage of money for capital expenditure. But the individuals are in good health and hence we think sectors related to consumer whether direct or indirect are a better play. Thus, we like FMCG, pharmaceutical, IT, Auto, Auto ancilliary,Hospitals and Media sectors. Even the retail franchise banks are doing better than the bulk lenders. If the government really starts doing more planned expenditure and policy reforms, one can invest in infrastructure and related sectors.

How does India stack up versus other emerging markets?

Amongst BRICs countries, Brazil's corporate profitability is in bad shape which has put the markets under pressure. Russia is a play on commodities and given that commodity market is under pressure now, Russia is not performing well. But despite this, firm oil prices is a positive for Russia. China has good financial condition as a country but because of poor export growth they have to balance their domestic economy. So this is a painful transition that is happening in China. At 13 times one-year forward price to earnings ratio, Indian markets are trading below their historical average price to earnings of 14.7 times.

What are your key concerns around markets?

My concern is that expenditure from India Inc is still not picking up. Also, government policy reforms should continue.

What indications are you getting from FIIs regarding Indian markets?

FII inflow in India will certainly be dependent on the government commitment to reforms and the real action on the ground. The FIIs are hopeful on India but they will review their decision because investmet cycle is still not picking up in India and there is some slowdown in the consumer discretionary side. So, it’s a wait and watch situation at this point of time.

How much rate cuts do you expect this year?  

I am more hopeful on rate cuts and expect further cuts of 50 basis points more in 2013.