Q&A: Jyotivardhan Jaipuria, DSP Merrill Lynch (India)

'Market could go down 10% from current levels'

Jyotivardhan Jaipuria, managing director and head of research, DSP Merrill Lynch (India), believes key stock market indices could correct another 10 per cent from current levels, but there will be a sharp rebound once the central bank’s policy turn for the positive. In an interview with Samie Modak, he shares his outlook for 2012. Excerpts:

In 2011, India was one of the worst-performing markets globally. What is your assessment of the year gone by?
The only market which did worse than India was Turkey — both in dollar as well as local currency terms. Primarily, it was due to inflation, which turned out to be much higher than the consensus estimates at the beginning of the year. This led to a series of rate hikes by the RBI (Reserve Bank of India). Now, that was obviously not good for the market. Second, somewhere growth also turned out to be much worse than expected and business confidence came down. The whole momentum we had seen in investments came off. It was a combination of growth concerns which was accelerated because of rate hikes, which brought the market down.

How much more pain could be left before the market start to rise?
The GDP will continue to disappoint a bit, given that capex and investments spends have slowed. We’ll have that situation continuing for another two or three quarters. Earnings will continue to disappoint. We could see the market going down 10 per cent from current levels due to these factors. After that, the key thing for the market will be how soon we see the situation reversing and policy action taken by the government. The steeper the fall in GDP growth, the more likely RBI will have to start focusing on growth and rate cuts. If worry about inflation was the 2011 story, growth concern will be 2012’s.

Post the correction, how do you see the market trajectory panning out ?
We’ll see a sharp rebound in the market once we see RBI policy turn for the positive. There will be a series of rate cuts from the central bank as they start focusing on growth concerns rather than inflation concerns. The policy will move towards accelerating growth. Which means we will see a series of rate cuts. This will be a major sentiment booster for the market.

How does the Indian market compare to other peers on valuation?
On a historic basis, Indian valuations today are lower than the long-term averages. To that extent, the markets are cheaper than what they have been in the past. On a relative basis, they are not as attractive. For, the market still trades at a premium to emerging markets. A year ago, on a historic basis, India was trading above long-term averages and on a relative basis, India was the most expensive market in the world.

Currently, valuations, which are at 13 times one-year forward earnings, are at a 10 per cent discount to long-term averages, which are 14.5 times. So, you are getting markets that are cheaper than the long-term history averages. The reason market tend to go below long-term averages is when the growth profile tends to get uncertain. At the same time, when you see rate cuts getting very aggressive, markets tend to go above the long-term averages.

Last year, FIIs pulled out over $500 million from the Indian equity market. What is the outlook for 2012 in terms of FII flows?
FII flows are important for the Indian market, as they account for about 45 per cent of the market free-float. Globally, EM (emerging market) funds saw a lot of outflows last year. By not selling in a bigger way here as they did in the other markets, EM funds increased their India weightage. So, the risk is that in spite of the bad news, we didn’t see enough selling, and there could be some round of capital outflows now. The good thing is that we may not see the selling if there are rate cuts.

Where do you think, the benchmark will be at the end of 2012? What are the preferred sectors?
We are looking at ending the year 10-15 per cent higher from the current levels. At present, we have pharma as our biggest overweight. We are also overweight on automobiles. As we move into the year, we will probably get even more overweight on the rate-sensitives. Meanwhile, we are underweight on metals and infrastructure.