The policy initiatives taken by the government has given a fillip to the market sentiments, but more strong measures need to be taken to ensure that the rally can be sustained, says head of investments, Canara Robeco Mutual Fund, Ritesh Jain. In an interview with Ashish Rukhaiyar, he says the macro fundamentals are still a cause for concern. Excerpts:
The much-awaited reform has finally seen a start. Already a couple of foreign brokerages have increased their Sensex target and reworked their India strategy. How is market seeing these factors?
From absolute lack of policy initiatives during the past year or so, the weekend saw the government hiking fuel prices which one would say is a tough political decision that was taken along with certain other measures to boost investors? confidence in India. Markets have welcomed the measures but these measures in itself are beneficial over the long term. These actions have given the markets much-needed breather, while it has to be seen how the government is able to handle a strong resistance for these measures from both opposition as well as coalition partners. The outcome of that would be determining the future course of re-rating.
What is your view on RBI action a few days ago… cutting CRR, but keeping rates intact.
The data which came out from RBI a few weeks ago showed that the Household Financial Savings in FY12 were at a decade low and fell to 7.8% of GDP. The total savings which were 32%-36% of GDP in last decade is expected to be below 30% in FY13. Savings at this stage are very crucial for the revival of economy. RBI cutting interest rates at this juncture will lead to fall in deposit rate, resulting in lower savings rate, thus, affecting recovery of the economy. Long-term interest rates are function of credit demand. So if RBI cuts rates and credit growth picks up in the coming quarters, lower bank deposits (due to low savings) would lead to a sharp spike in interest rates in a short period of time. Therefore, cutting rates at this stage appears very myopic solution to encourage growth.
Do you think the current rally can be sustained without any improvement in the macro fundamental factors?
Until last week, the rally was largely on back of weakening macro fundamentals and increasing global liquidity. But, the recent actions by the government in the form of raising fuel prices and also enhancing and allowing foreign direct investment limits in certain sectors have impacted sentiments positively. While these measures by itself are not very significant to improve the macro fundamentals of slowing economy in the near term but it shows the governments resolve to arrest the slowdown in the economy. Going forward, liquidity might keep the markets buoyant in the near term, policy measures to enhance growth would be the needed for the market rally to sustain.
Domestic financial institutions, including mutual funds and insurance companies, have been net sellers at a time when FIIs have been on a buying spree. What explains this contradictory stance?
FIIs have been net buyers to the tune of nearly $14 billion year-to-date. This is attributable to the fact ETF money is finding its way in the emerging markets. On other hand, DIIs are lacking any substantial inflows and have been net sellers. Even the investors in mutual funds (mutual funds constitute one-third of the total DIIs) are preferring debt as an asset class compared to equity in the uncertain times.
Some of the traditionally defensive sectors like FMCG and pharma have also seen a huge run-up in the valuations? Are they still looked upon as attractive investment avenue?
The current market environment is buffeted by uncertainties at both domestic as well as global levels and hence investors are very cautious regarding business fundamentals. Investors are ready to pay premium for sectors and companies having stable earnings visibility, under leveraged balance sheets and free cash flows. While the FMCG sector has seen an uptick due to consumption remaining strong, Pharma & IT sectors have benefitted on the back of depreciating currency. The ?Tina? factor (There is no alternative) seems to be playing out in favour of FMCG and Pharma where in spite of their high valuation, companies in these sectors continue to have better earnings visibility and growth prospects vis-a-vis companies in other sectors.
