What are your near-term and long-term views on Indian equities. How are we placed vis-a-vis other EM and DM equities?
Back in May, global equity markets were all moving higher. But, then obviously, what Bernanke said changed the whole game. It was immediately seen as a positive for the US dollar and crude oil prices. Markets, however, were not ready for this and US bond yields rose sharply. So, all of a sudden, it became ?buy? DMs, ?sell? EMs. In particular, it was felt that weaker EM currencies, coupled with higher oil prices, could lead to problems of higher CAD and inflation, leading to an even weaker currency. The problem in EMs was further exasperated by poor Chinese economic data and higher oil prices. For India, if you take the currency depreciation and today’s oil price, it is equivalent to crude oil at $150 a barrel ? seen in 2008. So, all the talk about commodity prices heading lower and current account deficit getting better has clearly not panned out in the short term.
What do you make of the markets right now? Also, what is the FII view on Indian equities in your opinion?
India remains the ?cleanest shirt? in the EMs laundry basket despite all the problems. However, given the recent lack of progress on the reform front, it is wearing a bit thin with investors. The story is okay up to a point, but somewhere, the government will need to do something that sets us apart from other markets. With the elections being so close, I am not sure what more the government can do in terms of bringing in new reforms. Also, one policy misstep could see investors changing their mind and asking ?should we remain invested
in India??
What is the quantum of fall or sell-off you foresee in Indian equities?
It is very hard to say because you are talking about an event. If you see a ?risk-off? trade in emerging markets, you will could see another $2 billion come out of India equities in the near term. And in that case, Nifty could drop to 5,200-5,500 range. However, I am not overtly bearish on Indian equity markets at this point.
Q1FY14 earnings have begun. What are you expectations?
At the beginning of CY13, I was saying 15% earnings growth, which more recently has fallen to 10-15%. I now see corporate earnings growing around 10%. Obviously, the currency weakness is going to have some negative implications for earnings, especially companies that have taken out dollar debt over the past year or have unhedged positions. This may pose further problems for the banking sector, which itself is trying to cope with higher restructured loans, rising NPLs and a very weak real
estate sector.
How would you trade the markets?
Since the beginning of CY13, we haven’t really changed our view of holding the defensive sectors and have not been swayed into switching towards interest rate sensitives, infrastructure, high beta companies, etc. And we are not likely to switch from defensives to interest rate sensitives in the short term. That said, we are nibbling away at selective companies in these sectors, but sticking to a high watermark with quality and value being the main benchmark for
investment.
