Equities should outperform over the next few quarters: Sashi Krishnan

Last Updated: Fri, Dec 07, 2012 07:40 hrs

pThe Indian government has shown clear intent to accelerate the reform process At the global level the US is likely to continue with the stimulus measures which should lead to a risk-on trade where emerging market equities should attract substantial flows says strongSashi Krishnanstrong CIO Birla Sun Life Insurance He tells emPuneet Wadhwaem that at this juncture the equity funds remain fully invested with low cash levels Edited excerptsppstrongHow convinced are you that the markets will move up from here on over the next few quartersstrongbr Equities as an asset class should outperform over the next few quarters Global liquidity is expected to remain easy in 2013 and this will result in a significant risk-on trade in 2013 resulting in substantial flows to emerging markets India being one of the few countries that still has comparatively high growth should attract part of this global liquidity The government has shown a clear intent to accelerate the reform process which should lead to two key gains &ndash better fiscal management and revival of the investment cycle On the fiscal consolidation front the key reforms to look out for are a new FRBM Fiscal Responsibility and Budget Management Act subsidy caps direct transfers of subsidies and the introduction of the goods and services tax and the direct taxes codeppRevival of the investment cycle will be the key to kick-starting growth As the reform process gathers momentum GDP growth should bounce back from the current low of 53 per cent to seven per cent next yearppstrongHow are you viewing the developments across the euro zone and the USstrongbr It appears almost certain that some intermediate solution will be found to resolve the fiscal cliff issue that the US faces The US is expected to continue with quantitative easing possibly beyond even 2013 which will result in easy global liquidity This should lead to a risk-on trade where emerging market equities should attract substantial flowsppEurope will still take a couple of years to shrug off its recession but the European Central Bank&rsquos ECB policies to stabilise peripheral Europe as well as recapitalise the European banking system appear to be working well Fears of a break-up of the European Union EU have receded The ECB&rsquos outright monetary transactions programme in the secondary sovereign bond market in Europe will also add to global liquidityppstrongWill foreign institutional investors FIIs prefer other emerging markets EMs to India given its set of problemsstrongbr India does not stand at a disadvantage as far as valuations and outlook are concerned especially when compared to other emerging markets Some emerging markets such as China Russia and South Korea are cheaper than India and will also attract FII flows India has already got over 19 billion in 2012 and this trend should persist in 2013ppHowever the key point to note is that India&rsquos PE price-to-earnings still trades at a discount to its long-term average of 15 times and Indian equities are not expensive On a PB price-to-book basis also Indian equities trade at a discount to the long-term average PB of 28 times whereas markets such as China South Korea and Indonesia trade at a premium or at book value The earnings outlook for India is also reasonableppThe consensus earnings growth expectation for India is around 12 per cent CAGR which is significantly better that the outlook for other emerging markets like China Indonesia and Malaysia From a comparative valuation perspective India is still looks attractiveppstrongHave your investment preferences in terms of sectors and stocks changed in the past three months Are you fully invested at the current levelsstrongbr We are long-term investors and have exposure to sectors that are largely driven by domestic demand and reflect the long-term India growth opportunity &ndash sectors like banking consumers pharma and information technology ITppIn the recent run-up valuation differentials between the defensives and cyclical have widened considerably With the emerging focus on speeding up reforms and reviving the investment cycle we will look for investment opportunities in cyclicals like industrials and infrastructure stocks At this juncture our equity funds remain fully invested with low cash levelsppstrongHow has the earnings season panned out for you What do you expect from the December and the March quarter results strongbr The second quarter corporate performance has surprised positively With the investment cycle picking up sectors that had below average earnings growth like industrials utilities and automobiles will show improvements in the next few quarters This would lead us to believe that earnings growth momentum seen in the second quarter will be sustainedppstrongWhat is your debt market strategy for the next 6-12 monthsstrongbr We have been increasing duration in our debt portfolios Bond yields can be expected to soften over the next two quarters for a number of reasons The government is working hard to reign in the fiscal deficit and inflation is expected to correct from its current levels of 75 per cent to below 7 per cent by March 2013ppSystem liquidity which is negative to the extent of Rs 1 lakh crore will also correct to more reasonable levels as the Reserve Bank of India RBI has undertaken a series of CRR cash reserve ratio cuts and open market operations While it would be premature to expect monetary easing in the true sense of the term there is a growing expectation that the RBI will cut interest rates albeit in baby steps Yield should soften benefiting bond fund investorsp

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