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The global markets are in a wait-and-watch mode to see how the US resolves its “fiscal cliff” issue. On the domestic front, Parliament’s winter session holds key on how the Governments reform agenda pans out going ahead. Jignesh Shah, executive director, Sarasin-Alpen (India) tells Puneet Wadhwa that the situation of policy paralysis, if any, would have a short-term negative impact on Indian equities. Edited excerpts:
Q. Do you think that the global markets, including ours, are facing more negatives than positives over the next few months?
A. By and large, investors in India have developed apathy for equity, since they have not made any noteworthy money in equities over the last few years. In fact, CAGR of front-line indices for last few years have been below 15 per cent p.a. And that’s reflected in their involvement in equities.
The view, that we have, is that equity markets will be impacted by both the factors – global factors that include US fiscal cliff and debt issues in European peripheral countries as well as local factors that include economic slowdown. It is difficult to predict how the Parliament session in India would pan out (whether Banking or Insurance laws would be amended), but the situation of policy paralysis, if any, would have a short term negative impact on Indian equities.
One may use such correction in equity, as an opportunity to increase exposure in risky assets, as valuation of equity which is below average, will become further attractive. Also, one can see that there is no significant build-up in leveraged position.
Q. India has attracted nearly $18 billion of flows this year. How do you see 2013 shaping up? What is the mood among global investors as regards India, as compared to the other Asian and emerging markets?
A. We are positive in terms of FII inflows for 2013. There are few indicators like emerging market bonds’ spreads, various volatility indices, dollar index, etc., which would signify ‘risk-taking’ or ‘risk-averse’ environment.
Going by these parameters, currently, we are in ‘risk taking’ phase and accordingly, we expect the FII flows to continue in the next year. Also, in terms of valuation of India, while comparing the same in relation to MSCI Asia or MSCI Emerging market, MSCI India is trading at little below or at par with averages.
Since, there are no clear growth drivers in developed markets, more and more global investors are looking at emerging markets specifically which are driven by domestic factors. And within that, India fares well.
Q. The Indian markets have rallied mostly on account of liquidity in 2012. Do you see fundamentals catching up anytime soon?
A. It is true that the 2012 rally in Indian equity has been largely contributed by global liquidity. We believe that fundamentals have been impacted because of few factors which have played out together. While all issues, may not get addressed immediately and simultaneously, it may happen gradually during 2013 and may start with a cut in interest rates in early part of 2013 and with other policy matters, as government seems quite committed to reforms and growth.
Q. How have the results September quarter season panned out for you? Is the worst behind us?
A. It seems the worst is over. FY13 consensus EPS estimates which had started with Rs 1,280 level is already down to Rs 1,220 levels. This means growth rate of less than 4 per cent, in FY13 estimated EPS over same of FY12. The good news is larger part of this cut in estimates happened prior to this result season. If one combines this with the other indicators like stable manufacturing PMI, cut in interest rates, it would mean that there may not be a need to downgrade earnings significantly, going forward.
A rate cut, if it happens in early 2013, as we have been expecting, same may improve the margins for companies/sectors which have leveraged their balance sheets. Also, lower rates imply better consumption and hence the revival in domestic demand, over period of time.
Q. If the FII money does continue to pour in going ahead, which stocks / sectors do you think will garner a significant chunk of it? Do you think that preferences could now shift from the safer bets to more risker assets?
A. We have been positive on rate sensitive sectors, as we expect rate cut to happen in early 2013. So, if FII money continues to pour in, we think it would flock mainly towards cyclical / rate sensitive sectors.
Of these sectors, our preferred ones are consumer discretionary (mainly automobiles) and BFSI (banking and financial services). Both these sectors have been attractive while looking at valuation in comparison to their respective five years average.
Within BFSI, PSU banks have corrected significantly because of concern over rising NPAs (non-performing assets). But, the same will turn out to be a positive trigger, as interest rate cycle turns around.
Other rate sensitive sectors like construction, infrastructure and capital goods have not been completely out of the woods and hence better to be a stock picker there. We do think that with ‘risk averse’ environment receding, the preferences could clearly shift from safer bets to riskier bets. The revival in Real Estate sector signifies the same.
Q. Can you elaborate your stance regarding the financial sector space – PSU banks, private banks and the NBFCs?
A. For 2013, we are positive on the banking sector. In first phase of rate cuts, banks may benefit in terms of higher unrealised gain on treasury book. But, over next phase, the quality of assets will improve with better economic climate. Additionally, banks are valued at book value adjusted to ROE (Return on Equity) divided by COE (Cost of Equity). With better economic environment, RoE improves vis-à-vis CoE and that augurs well for the banking sector. Currently, banks are trading at below their average valuation on P/BV basis and a good number of PSU banks are available with more than 3 per cent dividend yields.
For NBFCs, their business models could be based on a particular product line like housing finance, broking, gold loan or vehicle financing, which means not enough diversification, as compared to banks. Sustainable business model like housing finance would be worth considering, vis-à-vis a cyclical business model like stock broking.
Q. What is your investment strategy regarding cement, infrastructure and construction and the capital goods spaces? Would the stocks in these sectors be a good contrarian bets at the current levels?
A. While we can see buoyancy in the Cement price cycle to continue for some more time, we do not see equally same upbeat mood across all infrastructure and construction and capital goods companies.
Most construction and infrastructure companies have realised their mistakes of having contributed scarce resources to unrelated diversified businesses and a couple of them are rectifying these mistakes. So, such companies which are focusing on core activities and where business visibility in terms of growing order-book is available at reasonable valuation, one can participate in the same. But, there are very few at this juncture and this could be subjective.
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