The euphoria after the third round of US quantitative easing (QE3) and the European Central Bank’s bond buying programme has given way to caution, with the markets trading range-bound ahead of the US ‘fiscal cliff’ and the problems in the Euro zone. Pratik Gupta, head - equities, Deutsche Equities India, tells Puneet Wadhwa that for long-term investors, now is as good a time to buy as ever. Edited excerpts:
Our view is that globally, the worst of political and economic uncertainty is behind us – whether the political transitions in the US, Europe, China or the central bank policies of the ECB in particular. Global equities, as an asset class, should do relatively well, given a more stable global environment. With a lot of liquidity sloshing around, key emerging markets like India that have a more domestic consumption-driven economy should also do well.
Indian equities’ valuations are not expensive on a growth/ risk-adjusted basis and relative to their history, and there’s the upside from better-than-expected policy action, interest rate cuts and earnings growth.
Do you think it is a good time to get into the markets at the current levels or will the next three months give investors an opportunity to do so?
Despite the around 20 per cent year-to-date (YTD) rally, the headline Sensex valuation is still below its long-term average and 15 per cent discount to the past five-year average. It is difficult to time the markets and there is the risk of a near-term correction from some adverse political news (either from India or from the US/EU), but one can’t be sure about this. So, for long-term investors, now is as good a time to buy as ever.
Can you broadly specify the quantum of FII money that India might get in 2013?
It is tough to quantify but India has already seen about $19 billion of net FII inflows this year, a disappointing year so far in terms of gross domestic product growth/fiscal deficit, earnings growth and repo rate cuts.
The primary market has also not been very active this year. With street expectations already quite low in terms of India's macro-economic/earnings growth outlook next year, we expect 2013 should be much better and expect at least this level of foreign institutional investor inflows next year – assuming no major external/domestic shocks. We expect financials will attract the greatest interest.
In terms of portfolio allocation strategy, how much are you allocating towards Indian equities, as compared to the other emerging and Asian markets?
Deutsche’s Asia equity strategist is bullish on Indian equities, and currently recommends a strongly overweight stance versus other Asian markets. Indeed, recently India’s overweight in the benchmark Asia portfolio was raised to around 5.5 per cent versus around 3.5 per cent earlier.
Our Asia strategist believes the market is still undervalued on EV/sales, EV/Ebitda and PB, compared with history. The leading indicator from the Organisation for Economic Co-operation and Development has been rising for months, while our policy indicator has also moved up.
Is the worst behind us on corporate earnings? Have you tweaked your full-year estimates, given the recent numbers?
Yes, we believe the worst is over for corporate earnings although there may be specific sectors/stocks where Deutsche’s estimates are significantly below-consensus.
Overall, for Sensex companies, revenues were in line with estimates. But earnings before interest, tax, depreciation and amortisation (Ebitda) and net income were 3.4 per cent and one per cent, respectively, below estimates. Our analysts haven’t made many big earnings changes after the September quarter results. We expect Sensex earnings growth of around 10 per cent in FY13 and around 16 per cent in FY14.
Some market participants remain bullish on off-beat sectors like media & entertainment, cement, engineering & capital goods and telecom. What is your take on these spaces?
We like most of these sectors. Within media, the broadcasters should do well, as the ongoing digitisation drive should improve their earnings and bargaining power with advertisers. Cement has been one of our favourite sectors this year and we still like it — demand is strong and capacity addition is lagging, and it is one of the few sectors which offer high free cash flow yields and strong balance sheets, with attractive valuations given we’re at the early stage of a cyclical upturn.
We like capital goods as a sector, since we expect the pace of order inflows to improve in FY14 but one has to be very stock, specific and focus on companies with strong balance sheets. We're currently not very bullish on most telecom operators, given the regulatory uncertainty, strained balance sheets and unattractive valuations.
Would you avoid sectors like pharmaceuticals, FMCG, metals and banks, given the performance in 2012?
Given our relatively more positive view on the market, we continue to advocate adding beta to India equity portfolios, mainly through banks and select infrastructure plays. We recommend an underweight stance on pharmaceuticals, as we see valuations expensive, given the limited growth prospects.
On metals, we’re worried about the China slowdown but stock prices have already come off. So, we recommend a neutral stance at current valuations. On FMCG, we are more cautious than at the start of the year, given relatively expensive valuations in general. But there are still some stocks that offer good value for long term investors.
How concerned are you regarding all the noise being generated by the US ‘fiscal cliff’ and problems in the Euro zone? What strategy should one adopt regarding the sectors dependent on these two economies?
There is growing worry about the US ‘fiscal cliff’ but we eventually expect there will be a resolution, and the worst is behind us in terms of EU policy uncertainty, although 2013 is likely to see much slower growth in both these areas.
For Indian IT services, a slow growth environment means greater cost pressure and, hence, greater offshore outsourcing. While pricing will also remain subdued, a weak rupee should enable market share gains and good earnings growth for industry leaders. Valuations are also reasonable, considering the strong cash flow and balance sheets.