Headwinds of inflation, interest rate abating: Toral Munshi

Interview with Head, India Equity Research, Credit Suisse Wealth Management

Toral Munshi, head of India Equity Research at Credit Suisse Wealth Management, tells Puneet Wadhwa in an interview that the key to watch would be a recovery in the industrial cycle, which can improve domestic growth outlook for the second half of the year. Edited excerpts

Do you expect the macroeconomic headwinds on the global and domestic front to ease out in 2012?
Global growth in 2012 is forecast to slow down to 3.5 per cent. This is mainly due to a sharply lower growth in the euro zone, which is forecast to fall from 1.8 per cent in 2011 to 0.3 per cent in 2012. Macroeconomic outlook for the US remains stable with GDP growth estimated at 1.8 per cent, while Asian GDP growth (ex Japan) is estimated at 6.9 per cent in 2012.

On the domestic front, we expect India to grow 6.8 per cent in the financial year 2012-13. However, the other macro headwinds of inflation and a rising interest rate scenario are clearly abating. The key to watch would be a recovery in the industrial cycle, which can improve domestic growth outlook for the second half of the year.

How do you see the global equity markets, including India, shaping up? Is there more pain left before the markets start to rise? Where do you see the Sensex / Nifty at the end of CY2012?
Global earnings (per share) should continue to grow, although at a lower pace than in 2011 and valuation remains attractive. We, therefore, continue to see upside in equities, but volatility and risk appetite will determine the path of equity prices from month-to-month.

We expect single-digit cumulative total returns in equities over the full year in 2012. Indian valuation is also quite attractive at 12.5x FY2012-13E. Under our base case scenario of a gradual resolution to the Euro debt crisis and a growth rebound in the second half, we expect the Sensex to deliver a 12 per cent earnings growth and trade at 19,000 by year end.

China's economy grew at its weakest pace in two-and-a-half years in the latest quarter. How do you read into this development? What is the likely impact of this on global equity and commodity markets?
While China’s growth has decelerated in-line with the rest of the world, the Q4 GDP data was actually above consensus expectations. Despite external challenges, we expect a moderate growth slowdown in China in 2012 to 8.4 per cent against 8.8 per cent growth in 2011. China remains the key growth engine for the world, a soft landing in China should improve sentiment, especially for the commodity markets.

How do you see 2012 panning out with respect to the FII flows in the Indian equity space?
The outflows last year have been pretty low considering the strong underperformance of Indian equities, which indicates the strength of investor interest in India. Retail redemptions to a certain extent were balanced out by purchases by longer term foreign investors such as Pension and Sovereign wealth funds. Barring a credit event globally, we expect flows to be positive in 2012.

Do domestic macro-economic headwinds such as high interest rates, policy logjam and the rupee-dollar equation worry you too much or do you think the markets have already factored in all this?
I believe a lot of the above-mentioned domestic worries are priced in. Political uncertainty or a sharp slowdown in the GDP growth is a domestic event, which can cause further market correction.

Also, while it is well accepted that interest rates have peaked, markets are currently pricing in that RBI will start cutting rates early in Q2. A postponed response by the Reserve Bank of India (RBI) on interest rate reversal is the key near-term risk to Indian equities, in my view. The other key risk emerges from crude prices, which may spike due to supply disruptions from Iran.

Are there any sectors where you see value emerging from a medium-to-long term perspective? What are the sectors you are underweight and overweight on?
Two sectors where there is certainly value for long term investors are, the banks, especially the PSU pack, and the infrastructure sector. Recovery in industrial and capex cycle, policy measures to address longer term structural issues in infrastructure and a reversal in interest rate cycle will be the key drivers for improving the sentiment on these two sectors.

We are underweight on consumer staples and global commodities, maintaining our pharmaceutical overweight and gradually going marginally overweight on the banks and the infrastructure sectors in India. As global event risks still exist, we continue to hold 20 per cent cash as a hedge against any sharp event led market correction.