Your wealth now is Yellen's business
Nov 01 2013 , Mumbai
This time, when Financial Chronicle asked 10 brokerages in our regular pre-Diwali straw poll how Samvat 2070 will go, most of them ho-hummed, unwil-ling to predict where Sensex will be a year hence. They point to two big question marks: the results of the general elections next year and the timing of the rollback of the US bond buying programme.
Saying what they say on one of the questions needs no great insight: if the general elections give a decisive result, the market will zoom; but a hung Parliament will sink it.
On the issue of US bond buying programme (which releases $85 billion in cash into the market every month), the effect of a rollback will be predictable: it will stymie our market and the rupee the same way just the hint of a rollback by the Fed did in May.
God forbid, but if that happens (well, the question is when, not if) foreign investors who poured over $16 billion into Indian stocks this year may begin to pull out.
Looking back, Samvat 2069 has seen high volatility in most asset classes (stocks, currencies, gold, fixed income), except perhaps real estate. The year, despite the end gain, has for most part scared off ordinary and even some hardy investors. Gold, to which Indians have a pathological affinity as an investment parking lot, has lost 15 per cent in past 12 months in dollar terms, but the depreciating rupee has meant that prices in India have been steady.
Ordinary investors who repose their faith in mutual funds have been disappointed. Fixed-income schemes, considered the safest, were volatile in July and August when yields spiked after RBI stepped in to steady the crumbling rupee.
Sensex trading at a one-year forward multiple of 15 times earnings barely conceals the fact that a large number of stocks are trading well below the 2008 highs. Infrastructure, capital goods, metals, power and real estate stocks are all down by between 50 and 70 per cent from the 2008 peaks. Stocks of only consumption-oriented, export-led sectors (TI and pharmaceuticals, for example) and banking have been instrumental in taking the market to a new peak.
“There is a dichotomy in the valuation of index components,” says Rakesh Tarway, associated vice-president of research at Motilal Oswal Securities. For example, FMCG and medicine stocks are quoting at record premiums. But capital goods stocks are at record discounts to index valuations. Motilal Oswal Securities refused to predict Sensex on the Diwali of 2014.
Alex Mathews, research head of Geojit BNP Paribas Financial Services, still prefers to put his wager on equities but says properties could also give good returns next Samvat.
“Property valuations are likely to move up in the coming years, especially with the rupee at lower levels. Many NRI investors are keen on properties in India,” he reasons. He is willing to hazard a guess on where Nifty will be next Diwali — 6,750, gaining a modest 7 per cent.
Some of the brokerages say underperforming sectors may begin to move up if the next government at the Centre comes with a clear mandate. “If that happens the reform process will get a boost and the stock market can then give decent returns in the medium term,” according to Dipen Shah, head of private client group research at Kotak Securities.
Everybody agrees that high global liquidity has pitchforked our stock markets to the new highs, never mind the wide disparity in valuations among key sectors. Mathews acknowledges this and says that till early March equities and commodities may remain firm. The hope is that the US Fed will defer the rollback till March or so, and, therefore, dollars will keep flowing into India until then.
Pankaj Pandey, research head of ICICIdirect, concurs: “The extent of cheap money available to global investors far exceeds the investment opportunities. Too much liquidity across the globe is chasing too few assets, resulting in aggressive valuations.”
He apprehends that the talk of liquidity eventually shrinking will continue to drive volatility. One good thing may come out of this. “Once the excess liquidity is sucked out of the system by the US Fed, investors will be able to evaluate assets more realistically. Subsequently, we expect the market performance to be anchored on earnings growth,” he adds.
Dinesh Thakkar, CMD of Angel Broking, too points out that the delayed rollback in the US has come as a tailwind for emerging market economies. India, which witnessed considerable pressure on its currency due to fears of capital outflows, is now breathing slightly easy. The rupee has appreciated by more than 5 per cent since the beginning of September —somewhat in line with most emerging market peers.
Thakkar is one who thinks the US rollback, inevitable as it is, may begin in 2013 itself.
On the election effect, Thakkar is more optimistic than many. He believes things won’t be as bad as most people think even if the poll outcome is not decisive. “In the past we have had fractured mandates but India still managed to grow at 5-6 per cent,” he points out. He pins his optimism on the fact that ultimately any democratic government has to act as per the needs and aspirations dictated by its demographics. If there is one thing that dominates the psyche of India, it is growth. “Sooner or later any new government will have to focus on creating jobs by kick-starting investments, speeding up clearances and resolving policy bottlenecks,” he hopes.
To be fair to this government, a sense of urgency has marked its action in the past four or five months to keep the current account deficit within the target. Besides, clearances are being pushed for several big projects. This will continue no matter who comes to power after elections, according to Sonam Udasi, research head of IDBI Capital.
There have been other forms also such as cutting the fuel subsidy, letting higher foreign direct investment (FDI) in telecom, retail, aviation and pension companies.
D K Aggarwal, CMD of SMC Investments and Advisors, expects key foreign investments, especially in retail sector, to come in after the elections. “No matter who wins, it will mark the beginning of a change in the economy. Foreign retailers may not enter India before the elections, but once the results are out, India will once again be the favourite investment destination,” says a confident Aggarwal.
Not so easy, holds Pandey, as there are key policy issues still to be sorted out, specially the policy deadlocks related to environmental clearances and land acquisition for infrastructure, fuel linkages for the power sector and fuel pricing for the oil and gas sector.
Udasi expects a near-flat 12 months for Sensex. The index will touch 22,000 by next Diwali, he forecasts. Reason: there is more upside for small and mid-caps that have been underperforming the broader indices by a big margin. This will rectify itself, he thinks. (The BSE small cap index is trading 58 per cent below the 2008 high; the mid-cap index is lower by 40 per cent.)
Given their underperformance now, it is possible that the infrastructure-related sectors of capital goods, power, metals and real estate will see better days. The divergence in their performance now was also seen in the 1990s amid the dot-com frenzy when technology, media and telecom raced ahead before finally collapsing. A similar phenomenon marked property and power stocks during the peak of 2008. An encore is possible.
“Sector rotation is possible and once the new government is in place,” says Deepak Jasani, retail head of HDFC Securities. There will be reform and policy measures that will bring make infrastructure, power and capital goods stocks popular again. But he warns that, given their high leverage, most of these stocks may not revisit their earlier highs.
Tarway of Motilal Oswal Securities sees high probability of outperformance by the capital goods sector if the economy improves. “Valuations in this have very little downside. So one should start deploying funds in quality large-cap capital goods stocks,” he advises.
The Indian market has significantly underperformed developed markets. This year alone US equities have returned 24 per cent. In dollar terms, the Indian market may be in negative territory. Vikas Gupta of Arthveda Fund Management, a wealth management outfit, points to a survey that shows investors prefer 10-50 per cent of their equity exposure going to global equities rather than Indian stocks.
But one needs to be careful from hereon as the future could present a different scenario, with big fund managers such as Larry Fink of BlackRock having warned that the Fed’s policy is contributing to “bubble-like markets” in the US.
That description of the market could apply to India’s FMCG and medicine stocks, which have been in an extended bull phase, aided by good rural spends. Not to worry, says Shah of Kotak Securities. He predicts: “Consumption demand is expected to remain strong in rural areas on the back of NREGA, higher MSPs and a good monsoon. Companies catering to rural consumption will report good growth in the months to come.”
Aggarwal has this to say about the rural market: The good monsoon, NREGA and election spending will surely boost the rural economy and increase income levels of rural people. This will spice up the revenue generation capability of FMCG and consumption-oriented companies. But, he adds, the earnings of HUL and ITC clearly reflects that profit margins are under squeeze despite decent volume growth. Further, the bear market of the past two years has pushed a lot of money to stocks like HUL and ITC, leading to expensive valuations. “Keeping all these factors into account, the upside for these stocks appears to be limited,” Aggarwal says.
Thakkar has faith in the long-term India consumption story, “It is intact.” Consu-mption in many promising categories is still very low in urban India. In rural India, the penetration of these products is still lower. With rising income levels and changing consumer behaviour, Thak-kar expects consumer spending on branded FMCG products to rise. But the has the same concerns as Aggarwal — that high valuations of FMCG stocks are already high. Among export stocks, IT shares will continue to sizzle. The rupee depreciation has helped IT companies price their services more competitively. Indian software employee salaries continue to remain just a fourth of those in the US; so more work can be expected to come India’s way.
As for pharmaceuticals, once the companies settle their problems with the US Food & Drug Administration there will be no looking back for them. But the view ahead is still foggy.
In Samvat 2069 a large section of the Indian market has not participated in the rally. Fingers remain crossed on how they will do in the next Samvat.