RBS private banking expects mid caps to outperform large caps in 2013 in a ‘risk-on’ environment as also the former are attractively priced on standalone and relative basis.
In its 2013 India outlook, the private banking arm of RBS revealed that it is marginally overweight on Indian equities and is looking for volatility to increase exposure. While the market is trading close to its historical average one-year forward earnings multiple of 13.8, it expects Nifty earnings to grow at 14% over two years ending 2014.
It expects market returns to be in line with the earnings growth and sees the Nifty ending the year at 6,600, an upside of 9% from current levels.
Even as it expects improved fortunes for the banking sector in 2013, especially that of private sector banks with diversified loan portfolios, on the back of a stronger pick-up in credit growth, RBS private banking prefers consumer staples, healthcare and IT sectors and maintains a negative stance on telecoms, utilities and industrials.
“In India, both FMCG and healthcare as such are not pure defensive plays, given the structural shift that is being observed by them. We expect strong volume growth to sustain for some of the companies,” said Rajesh Cheruvu, CIO, India, RBS private banking.
It expects the trend of sub-6% GDP growth to continue for another two-to-three quarters, after which policy push and monetary policy trajectory is seen re-accelerating growth to an estimated average of 6.3% in 2013 compared to 5.3% in 2012. On the back of a fall in inflation, the private banking unit anticipates 50 basis points of interest rate cut during the first half of the year.
Although the government has targeted the fiscal deficit below 5% of GDP in 213-14, “any reversal in recent reforms or expansive fiscal measures during the upcoming pre-election Budget could cause setbacks to markets”, it said in a note.
It sees monetary easing and lower rates supporting the longer duration bonds with the 10-year yield declining towards 7.3% in 2013 from current 7.9%.
As for gold, it maintains a 'neutral' stance as the 'risk-on' trade could limit the upside for the yellow metal even as low interest rate in the global economies may provide a support.