Market Voice: Harshad Patwardhan, JPMorgan Asset Management

'Policy paralysis and inflation key concerns'

Harshad Patwardhan, executive director and investment manager (equities) at JP Morgan Asset Management, tells Jinsy Mathew medium-to-long term prospects of the Indian economy continue to be bright. Edited excerpts:

How do you see the markets panning out in the near-to-medium term?
The recent behaviour of the Indian equity market has been a bit surprising. Against the backdrop of several negatives – most notably the high and rising crude oil prices – the market bounced back quite sharply in March, driven mainly by strong foreign institutional investor (FII) inflows.

So, it’s very difficult to predict how the equities will behave in the near-term. On a relative basis, among the emerging markets, India’s current valuations are not necessarily the most compelling, as of now.

However, over the medium-to-long term, we expect equity markets to do well, driven mainly by the earnings growth of corporate India.

How does JP Morgan see the developments in the Indian economy in comparison to the other emerging markets?
We believe medium-to-long term prospects of the Indian economy continue to be bright, driven by favourable demographics, rising income levels across the pyramid and investment in infrastructure.

However, in the near-term, policy paralysis and inflation are two key concerns. More specifically, crude oil prices remaining at elevated levels for an extended period will not be good news for the Indian economy.

What is your opinion on the current inflation trends?
While headline inflation may have peaked, it remains a key source of concern for the policy makers and corporate sector. Buoyant demand, growth driven by increasing income levels and the lack of adequate investment on the supply side will likely keep inflation a major issue in the near future.

Higher commodity prices — mainly oil — are adding to the pressure on inflation although retail fuel prices in India are not passed on to consumers immediately.

What are your expectations from the fourth quarter earnings of India Inc? What sectors are you bullish on from a medium-term perspective?
In the fourth quarter of FY11, we expect corporate India’s earning growth to be in the high teens. From a medium-to-long term perspective, we remain positive on both the consumption and investment themes.

Within the consumption theme, we are more positive on the discretionary side. Within the investment theme, we are a bit cautious about businesses having a lot of government interface.

Any sectors/themes you prefer in the mid-cap space?
While small and mid-caps may have done well over the past few days, it is difficult to say whether that’s going to be the trend. Over the last three quarters ended March 2011, large cap stocks have generally done better than small and mid-cap ones.

However, we do believe that over a longer time, horizon-quality small and midcap stocks ( financials, auto, pharmaceuticals and engineering) will likely outperform larger peers as growth can often be faster on a low base and there is an opportunity for valuation re-rating.