During the remaining part of the year, Indian equities could generate decent returns, though not at the same pace, says Manishi Raychaudhuri, head of research, BNP Paribas Securities India, in an interview with Puneet Wadhwa. Edited excerpts:
The Indian markets have seen a good up-move in the current calendar year. Did you anticipate this coming in right at the start of the New Year?
While some upside to Indian equities was expected at the 2011-end, owing to cheap valuations and improving fundamentals, the strength of the recent upmove was unexpected. However, the upsurge in global liquidity has led to large foreign institutional investor (FII) flows into Indian equities, leading to strong appreciation in equities.
Over the remaining part of the year, we expect equities to generate decent returns, though not at the same pace. We expect Indian equities to consolidate at the current levels till the first half of March, when two important pieces of news come out – the election results and the Budget. Post-Budget, possibly from the second quarter, equities should start moving up again.
Why has this appetite for equity emerged right from the beginning of 2012 at the global level?
The most important driver of revival of risk appetite is the ECB’s (European Central Bank) three-year LTRO (Long-Term Refinancing Operation), which has injected liquidity in the eurozone banking system and has also reduced strains at the sovereign level. The second factor behind the improvement in risk appetite has been continued resilience of the US economy and its ability to decouple from the worst of the downdraft created by the eurozone debt crisis. The third factor underlying risk revival has been the ‘bottoming out’ of the global manufacturing cycle.
What are your preferred bets in terms of sectors / stocks in the Indian context, where the risk-reward ratio looks favourable?
We prefer the domestic cyclicals – engineering, construction, automobiles and private sector banks. We also like the sectors and stocks which offer visibility about revenues and cash flows, like telecom and regulated utilities.
We are underweight on classic defensives like consumer staples, and on global cyclicals like metals, and energy. However, among non-ferrous metals there are a few stocks whose valuations and medium-term fundamentals appear attractive.
A few key examples from the sectors we like are L&T, Hero MotoCorp, Idea Cellular, Hindalco and IRB Infrastructure.
Do you think the worst may be behind us as far as the performance of the Indian economy is concerned? Do you expect RBI to slash key rates in the coming policy review?
Much has gone right for India in 2012. Leading indicators suggest the economy may have bottomed out in Q3FY12. Fall in inflation, driven by a seasonal decline in food prices, opens RBI’s policy space to support growth. Recent initiatives also provide some room for optimism on the reforms front.
It seems only foreign institutional investors (FIIs) are playing the markets, given the strong flows, while retail investors are still fence-sitters. Do you agree?
The data declared by the stock exchanges would clearly indicate so. In 2012 YTD, the FIIs have bought Indian equities to the tune of $7.1 billion, while the DIIs have sold to the tune of $3.5 billion. However, out of that $3.5-billion selling, insurance companies have sold $2.8 billion and mutual funds $700 million.
Anecdotal evidence indicates a large part of the selling has come from public sector insurance companies, which could be significant subscribers to the upcoming government divestment programme.
What are the key takeaways, according to you, from the December quarter results of India Inc?
The December quarter results were largely better than expected. Except for second tier engineering companies and a few public sector banks, we did not encounter major negative surprises.
Earnings estimates are also showing signs of bottoming out. Going forward, while there could be some small downside to FY13 EPS estimates, we think earnings estimate downgrades are largely behind us.
Do you see a pick-up in the investment cycle this financial year?
We expect a pick-up in the investment cycle in FY13, possibly in the second half. We expect the Reserve Bank of India (RBI) to start reducing interest rates from March / April. And historically, sustained interest rate reduction has ignited a capex cycle with some time lag.
How do you see the commodity space panning out in 2012 given the global macro-economic headwinds?
Usually, commodities don’t do well in the face of global macro-economic headwinds, but now we have significant liquidity injection in the developed economies. That has already boosted commodity prices, and could continue to do so if such liquidity injection continues.
For some commodities like oil, geopolitical tensions have become a bigger influencing factor than the state of global economy.
In 2012, the performance of commodity stocks could be mixed. We prefer those that have relatively low risk to the underlying commodity prices (e.g. aluminum) and those that have relatively low leverage in their balance sheets.