US shutdown to have mixed effect on emerging markets

Oct 04 2013, 03:32 IST
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Summary'We continue to be overweight on consumer staples, healthcare and IT'

Markets would hit their new lifetime highs after elections, says Rajesh Cheruvu, chief investment officer, RBS Private Banking. With Indian equities facing several headwinds at present, RBS Private Banking is advising investors to add Chinese and US equities to their portfolios, said Cheruvu in an interview with Jash Kriplani. Excerpts:

What is your sectoral view?

We continue to be overweight on consumer staples, healthcare and IT. However, keeping in mind the current macroeconomic environment, we recently downgraded Financials and Industrials to underweight from neutral. We have also upgraded Utilities and Consumer Discretionary to neutral from underweight. Valuations in utility sector are quite attractive as the sector has seen a sharp correction in the last 2-3 quarters. Within consumer discretionary, earnings momentum is decent and export-led volumes have also turned healthy in the last two months. Apart from this, the good monsoons should also support for rural demand.

How are FIIs viewing Indian markets?

FIIs turned positive on Indian equities since the beginning of September even before the Federal Open Market Committee (FOMC) meet took place. At the same time, FIIs are exiting from debt markets in emerging economies.

Why have you downgraded Financials?

The public sector banks make up a major portion of the banking sector in India. Given the continued slowdown in the economy, these banks are likely to see further corporate debt restructuring (CDR) stress. We expect the PSU bank space to continue to languish. Net-interest margins (NIMs) would continue to be under pressure for the sector. However, within Financials, we continue to like new-generation private sector banks as they are well-placed in terms of credit practices and low-cost deposit base, which would help them negotiate the current pressure. Although valuations in the banking space are attractive, it is not a sufficient parameter to take fresh exposure in Financials.

How do you see the US government shutdown affecting the markets?

It will have a mixed implications on emerging markets. The emerging market economies have been witnessing recovery in exports to the developed markets especially to the US in the recent past. The shutdown could slowdown export-led growth as the consumer confidence and other demand drivers in the US would take a beating. At the same time, if the shutdown continues, the quantitative easing (QE) tapering is likely to be further delayed.

When do you expect tapering to start?

The US Fed is unlikely to announce tapering

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