Amar Ambani, head research (India private clients), IIFL, tells Puneet Wadhwa that India’s valuations have become reasonable in absolute terms and the risk-reward has turned favourable for long-term investors, though some concerns exist. Edited excerpts:
The global markets have been witnessing a sell-off on account of growth concerns. What is the near-term outlook for the Indian equity markets?
The steep losses in India are part of a worldwide sell-off that spread from Asia-Pacific to Europe. The US stock futures tumbled, as trepidation about the global growth prospects and Europe’s sovereign debt crisis weighed on the sentiment. The broader market has been weak over the past few sessions. One should be careful while trading in this set of stocks as they tend to be volatile and illiquid.
How do we compare with the emerging markets post the dip? Which sectors/stocks look attractive from a medium-term perspective?
Indian equities have fallen substantially but the same is true for other emerging markets (EMs). Therefore, there isn’t a case for India outperforming other EMs in the medium term. Also, the return on equity for Indian equities, which was significantly higher in the past, has fallen by 4-5 percentage points. Having said that, I would tend to agree that valuations back home have come down to reasonable levels in absolute terms and the risk-reward has indeed turned favourable for long-term investors.
We like Mahindra & Mahindra in the auto space: Tractor and utility vehicle (UV) sales are going strong, quarterly results have been good; the non-auto business is also gaining traction. We are also positive on the information technology (IT) pack. While the situation in the US has been grim, this has been widely known and well captured in management commentary and valuations. Even if US growth remains anaemic, Indian IT will continue to grow. Long-term investors should also monitor the banking space. Net interest margins (NIMs) will stabilise, asset quality will not be an issue since we are almost at the peak of the rate cycle and valuations are attractive. ICICI Bank and Axis Bank are our top picks.
Do you expect fund flows into India to pick up and Why?
It is difficult to take a call on the foreign institutional investor (FII) flows during the second half given the present global situation. Whether the third round of quantitative easing (QE3) comes in or not and the form it takes, will, to an extent, dictate fund flow in EM equities and commodity markets. We must not be overly optimistic about money flow given domestic headwinds of inflation and policy inaction in India.
How did the June quarter results season pan out? Have you tweaked the earnings’ estimates for India Inc given the macro-economic headwinds?
The June 2011 quarter has been marginally below expectations. We are in the process of reworking our earnings but my sense is that we may see more earnings downgrades by the analyst community.
Do you expect the RBI to hike rates? Have the markets factored in this? How should one play interest rate sensitive sectors now?
We believe the tightening cycle is coming to an end with probably another 25 basis point (bps) hike. However, this would be a symbolic hike re-affirming the central bank’s strong anti-inflationary stance and the market recognises this. Therefore, any adverse reaction to rate increase is unlikely.
What is your near-to-medium term outlook for precious metals, oil and INR?
On precious metals, we reiterate our bullish stance on gold. Prices may witness a moderate correction. In fact, we advocate a dip in gold prices to be considered as a momentary aberration of the secular bull trend and should be utilised as an opportunity to buy. Silver prices are expected to remain range-bound.
On the energy front, crude oil prices have been suppressed by gloomy economic scenario in the US and Europe, where the consumption for total oil products is on a persistent decline. However, in the short term, energy prices may derive support considering the fact that peak hurricane activity sets in around September.
On the rupee front, a break above 44.75 has increased the probability of further depreciation in USD/INR. Factors such as dampened investor sentiment, falling equity markets and oil payments indicate the possibility that INR may fall towards 46.30 initially. There is also a potential for a push towards 46.80.
