Market Voice: Samir Bimal, ING Private Banking
'Cumulative hike of 100 bps expected this year'
As a surge in core demand-side inflation is being witnessed in addition to the supply-side induced inflation, the RBI is expected to continue raising rates, Samir Bimal, Country Head, ING Private Banking, tells Puneet Wadhwa. Edited excerpts:
What is your outlook for the Indian equity markets for the near-to-medium term?
Do you see any improvement in foreign institutional investment (FII) into the country in the current financial year? For the last one year, the Sensex has been trading in a broad range of 16,000-21,000. We expect the markets to be volatile in the near-to-medium term, but do not expect them to break this range significantly on either side.
While the domestic known positives of higher growth, demographics and relatively reasonable valuations will keep providing support to our markets at lower levels, global macroeconomic headwinds are likely to cap significant upsides.
We have been attracting decent portfolio inflows since the past few years, and that should continue barring any significant global contraction in liquidity.
Another important determinant of the flows will be the investors’ perception and outlook on risk, as the world economy is coming out of one of the worst global recessions. Any low probability but high impact event can lead to risk aversion and outflows as experienced in 2008.
What are the top three sectors to watch out for in 2011? Why?
We are positive on the consumption theme for the year and remain bullish on
a) Financials: Strong macro story, play on the Indian economy, under-banked population and huge scope for financial products.
b) Consumer staples: Rising per capita income, favourable demographics, changing lifestyle, growing rural prosperity, besides positive job outlook and wage inflation.
c) Telecom: Selectively positive. Revenue growth due to rising data volumes and wireless broadband services, improving operational metrics across the top-tier incumbents, estimated positive free cash flow from 3G in FY12, possibility of license cancellation of the new incumbents and reduction in price war intensity,
What is your expectation from the Q4 FY11 results of India Inc? Do you think that the markets have already discounted the same?
We have entered the current earnings season with a consensus expectation of a top line growth of around 20 per cent and some pressure on margins on account of rising input and financial costs.
The results so far have been broadly in line. While the results of Reliance Industries and Infosys were below market expectations, cement and financials exceeded expectations.
Aggregate numbers are in line and keeping the markets in good stead. The disappointments at company levels were punished severely. Going forward, a higher cost of funds might eat into margins for some time.
Given the pace of increase in inflation, do you think the Reserve Bank of India will continue to raise rates this year? What is the quantum of the rise expected in FY11?
Of late, in addition to the supply-side induced inflation, we are also witnessing a surge of core demand-side inflation as the transmission of input prices to output prices has been leading the rise in inflation.
Given this background, we expect the RBI to continue hiking rates in FY 2011-12 with a cumulative expected hike of 100 bps.
How do you see the G-Sec yields panning out in the near term? Do you think the Indian government will be able to bring inflation to manageable levels by the end of the current fiscal?
Given the recent surge in demand-side inflation, we expect WPI inflation to average at 8.5 per cent y-o-y for the current year.
We do expect a moderate increase in the 10 year G-sec yield to approximately 8.25 per cent to 8.35 per cent in the near term but do not expect a significant upside beyond 8.35 per cent as the market is likely to anticipate these rate hikes at the near end of the tightening cycle.
Given the spike in precious metals (gold and silver) and the current equity market condition, what investment strategy would you suggest to investors from a medium-term perspective?
The new highs of gold and silver prices despite the rally in the equity markets indicate fears over the recovery in the developed economies still persist and investors are inclined to convert some of their financial assets to real assets.
The spike is also getting fuelled by investment demand from investors in these areas. We expect the markets to display higher volatility and in this environment we suggest investors to stay invested for the long-term component of the portfolio but for the short-to-medium term component, a more dynamic strategy could be explored.