The global markets are in a wait-and-watch mode to see how the US resolves its “fiscal cliff” issue. On the domestic front, Parliament’s winter session holds key to how the government’s reform agenda pans out. Jignesh Shah, executive director, Sarasin-Alpen (India) tells Puneet Wadhwa that a situation of policy paralysis, if any, would have a short-term negative impact on Indian equities. Edited excerpts:
Do you think the global markets, including ours, are facing more negatives than positives over the next few months?
By and large, investors in India have developed apathy for equity, since they have not made any noteworthy money in equities over the last few years. In fact, CAGR (compounded annual growth rate) of frontline indices for the last few years have been below 15 per cent per annum. And that’s reflected in their involvement in equities. The view, that we have, is that equity markets will be impacted by both factors – global, that include US fiscal cliff and debt issues in the European peripheral countries as well as local factors, that include economic slowdown. It is difficult to predict how the Parliament session would pan out (whether banking or insurance laws would be amended), but the situation of policy paralysis, if any, would have a short term negative impact on Indian equities. One may use such correction in equity, as an opportunity to increase exposure in risky assets, as valuation of equity, which is below average, will become further attractive. Also, one can see that there is no significant build-up in leveraged position.
India has attracted $19 billion of flows this year. How do you see 2013 shaping up? What is the mood among global investors with regards to India, as compared to other emerging markets?
We are positive in terms of FII inflows for 2013. There are few indicators like emerging market bonds’ spreads, various volatility indices, dollar index, etc, which would signify ‘risk-taking’ or ‘risk-averse’ environment. Going by these parameters, currently, we are in ‘risk taking’ phase and accordingly, we expect FII flows to continue in the next year. Also, in terms of valuation of India, while comparing the same in relation to MSCI Asia or MSCI emerging market, MSCI India is trading at little below or at par with averages. Since, there are no clear growth drivers in the developed markets, more and more global investors are looking at emerging markets specifically which are driven by domestic factors. And within that, India fares well.
The Indian markets have rallied mostly on account of liquidity in 2012. Do you see fundamentals catching up anytime soon?
It is true that the 2012 rally in Indian equity has been largely contributed by global liquidity. We believe that fundamentals have been impacted because of few factors which have played out together. While all issues may not get addressed immediately and simultaneously, it may happen gradually during 2013 and may start with a cut in interest rates in the early part of 2013 and with other policy matters, as government seems quite committed to reforms and growth.
How have September quarter results season panned out for you? Is the worst behind us?
It seems the worst is over. FY13 consensus EPS estimates which had started with Rs 1,280 level is already down to Rs 1,220 levels. This means growth rate of less than four per cent, in FY13 estimated EPS over the same of FY12. The good news is the larger part of this cut in estimates happened prior to this results season. If one combines this with the other indicators like stable manufacturing PMI and cut in interest rates, it would mean that there may not be a need to downgrade earnings significantly, going forward.
A rate cut, if it happens in early 2013, as we have been expecting, may improve margins for companies/sectors which have leveraged their balance sheets.