The market might lack triggers for further rally unless the
government delivers on better fiscal management and pushes reforms, says J
Venkatesan, VP equity at Sundaram Mutual Fund, in an interview with Prasanna
Deshpande. Excerpts:
How do you see the Indian equity market behaving during
2012-13? Are stocks attractively valued, and going ahead, do you see further
rally?
The Indian capital market should continue to remain volatile in the current year also. Throughout last year, the market was worried about the European crisis, but with the infusion of about Euro 1 trillion into the system through LTROs, the huge global risk seems to have been averted in the short term. With the ensuing surge in global risk appetite, India also received good FII inflows, which moved the market by more than 10 per cent in this calendar so far. But the domestic risks still remain.
While we do expect the interest rate cycle to start reversing this year, there may not be a significant reduction. Inflation might start inching up again from June. Unless the government delivers on better fiscal management and further reform measures, the market might lack triggers for fresh rally despite being valued at around the long term average of 14 times FY13 earnings.
Which sectors and stocks you are betting on?
We cannot talk about stocks. But at this point of time, we continue to like defensive sectors like pharma, consumer stocks, including staples, discretionary items and autos. We believe the non-performing loan cycle might peak in about two quarters, hence financials could be a good medium-term play. We would like to remain underweight on commodities and real estate. We also remain underweight on the IT sector as we are apprehensive of their growth because of delay in global discretionary spending.
What do you expect from the January-March quarterly earnings season? Will corporate earnings improve in the coming quarters?
While overall growth for the year could be in the region of about 10 per cent to 13 per cent for this quarter, there would be earnings dispersion across sectors next year. While pharma, consumer goods and financials could see better earnings growth, materials could show de-growth. Further, we also feel that there could be earnings downgrades, though of lesser degree.
Do you think RBI will cut repo rate in its next credit policy announcement? How much do you expect the RBI to cut key rates this financial year?
We do expect RBI to signal a rate reversion cycle with a modest 25bps in the April policy. Having said that, we do not think overall rate cuts would exceed 75bps for the current financial year.
Do you expect inflation and fiscal deficit to decline in FY13?
It would be difficult for the government to meet the 5.10 per cent fiscal deficit target. They have slipped by 130bps for the FY12. We expect inflation to come down to around 7.30 per cent in FY13 from 8.60 per cent in FY12.
Will FIIs continue to infuse funds in domestic stocks or will they pause on macro-economic worries?
The Indian market was the second-worst performing market in dollar terms globally in calendar 2011. We have received decent flows in the current calendar so far. From hereon, their flows would depend on the relative attractiveness of our market and their risk appetite levels. But if domestic factors improve significantly, we can expect the flows to continue.
On the global front, do you expect the US to come out with QE3, and what, according to you, would be its implications for the global financial market?
We do not think QE3 is likely in our base case. But we may not completely rule out QE3 with the US presidential elections around the corner and should the US economy throw up negative surprises. Should that happen, there would again be a surge in risk appetite levels and commodity prices would move up in the short term.
Will commodities market turn volatile if more liquidity enhancing measures are adopted by the west? At what level do you expect crude prices to stabilise?
Commodities would turn volatile more on account of a slowdown in China's growth. China being one of the largest consumers of commodities, their slowdown would disturb the demand-supply dynamics and impact prices. In the short-term, crude price is more a function of political disturbance in West Asia, but in the medium term, we think it will stabilise at current levels.
The Indian capital market should continue to remain volatile in the current year also. Throughout last year, the market was worried about the European crisis, but with the infusion of about Euro 1 trillion into the system through LTROs, the huge global risk seems to have been averted in the short term. With the ensuing surge in global risk appetite, India also received good FII inflows, which moved the market by more than 10 per cent in this calendar so far. But the domestic risks still remain.
While we do expect the interest rate cycle to start reversing this year, there may not be a significant reduction. Inflation might start inching up again from June. Unless the government delivers on better fiscal management and further reform measures, the market might lack triggers for fresh rally despite being valued at around the long term average of 14 times FY13 earnings.
Which sectors and stocks you are betting on?
We cannot talk about stocks. But at this point of time, we continue to like defensive sectors like pharma, consumer stocks, including staples, discretionary items and autos. We believe the non-performing loan cycle might peak in about two quarters, hence financials could be a good medium-term play. We would like to remain underweight on commodities and real estate. We also remain underweight on the IT sector as we are apprehensive of their growth because of delay in global discretionary spending.
What do you expect from the January-March quarterly earnings season? Will corporate earnings improve in the coming quarters?
While overall growth for the year could be in the region of about 10 per cent to 13 per cent for this quarter, there would be earnings dispersion across sectors next year. While pharma, consumer goods and financials could see better earnings growth, materials could show de-growth. Further, we also feel that there could be earnings downgrades, though of lesser degree.
Do you think RBI will cut repo rate in its next credit policy announcement? How much do you expect the RBI to cut key rates this financial year?
We do expect RBI to signal a rate reversion cycle with a modest 25bps in the April policy. Having said that, we do not think overall rate cuts would exceed 75bps for the current financial year.
Do you expect inflation and fiscal deficit to decline in FY13?
It would be difficult for the government to meet the 5.10 per cent fiscal deficit target. They have slipped by 130bps for the FY12. We expect inflation to come down to around 7.30 per cent in FY13 from 8.60 per cent in FY12.
Will FIIs continue to infuse funds in domestic stocks or will they pause on macro-economic worries?
The Indian market was the second-worst performing market in dollar terms globally in calendar 2011. We have received decent flows in the current calendar so far. From hereon, their flows would depend on the relative attractiveness of our market and their risk appetite levels. But if domestic factors improve significantly, we can expect the flows to continue.
On the global front, do you expect the US to come out with QE3, and what, according to you, would be its implications for the global financial market?
We do not think QE3 is likely in our base case. But we may not completely rule out QE3 with the US presidential elections around the corner and should the US economy throw up negative surprises. Should that happen, there would again be a surge in risk appetite levels and commodity prices would move up in the short term.
Will commodities market turn volatile if more liquidity enhancing measures are adopted by the west? At what level do you expect crude prices to stabilise?
Commodities would turn volatile more on account of a slowdown in China's growth. China being one of the largest consumers of commodities, their slowdown would disturb the demand-supply dynamics and impact prices. In the short-term, crude price is more a function of political disturbance in West Asia, but in the medium term, we think it will stabilise at current levels.
Source: http://www.mydigitalfc.com/companies/market-will-remain-volatile-year-too-556
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