Further delay in investment cycle can drag market

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Further delay in investment cycle can drag market
Stock valuations in the market are in line with historical averages at present, says Sandeep Nanda, chief investment officer of Bharti AXA Life Insurance. In an interview with Rajesh Abraham, he says for the market to have meaningful upside from the present level, the pace of earnings downgrade has to stop and the upgrade cycle has to begin. Excerpts:

We have seen the market rallying immediately after the government announced a slew of reforms such as petroleum subsidy cut, cap on LPG cylinders and FDI in retail. But the rally seems to have fizzled out. What is the reason, you think?

After the flurry of reformist announcements, expectations got built up that a lot more will follow. But as Parliament went into its session, political posturing gathered momentum and the initial burst of announcements lost did not lie up to the expectations.

What are the key triggers you anticipate for the market to go up from here on?

Positive policy news flow should continue for the improved investor sentiment to sustain. The government has hinted at more reforms and fiscal consolidation measures going forward. This is critical as we believe that for corporate capex to recover on a multi-year basis and on a big scale, there is a need for legislative reforms like land acquisitions bill, labour reforms and GST bill.

Given the current political environment, it seems that many of the administration-linked reforms will be easier to implement than the legislative ones. We remain optimistic that the reforms process will continue. Also, the pace of earnings downgrade has to stop and the upgrade cycle has to begin; it does look like we are near the bottom of the downgrade cycle, but the upgrade cycle may be some time away. We think resumption of the rate cut cycle next year should act as another catalyst.

There is a consensus that the interest rates have peaked and the Reserve Bank of India (RBI) will start cutting rates from Jan-Mar 2013. What is your view and what are the factors that favour such an exercise?

It’s difficult to say the quantum of rate cuts that can happen over the short term. However, it is clear that rate cuts will resume soon and should go down significantly over the next two years, unless oil prices and other global commodities play spoilsport again and inflation proves stickier than expected. In fact, due to adequate liquidity, borrowing rates have been coming down. Wholesale lending rates are down about 200-250 bps. We hope that more announcements by the government on fiscal consolidation, supply-side policy measures and deceleration in underlying inflation should create room for RBI to restart rate cuts soon.

There are global risks such as the fiscal cliff in the US and the unending troubles in the euro zone, not to speak of the Chinese economic slowdown. What are the implications for India?

Visibility on the fiscal cliff issue should come soon in the coming months as its unlikely to be left unresolved. We think that the US economy is on a better footing for next year compared with the euro zone resolution, which is likely to be more gradual and a multi-year process. It also seems that China is slowing down but not hard landing, though the stimulus over there could also take time given the recent political changes. On the other hand, a severe Chinese slowdown could mean much lower or stagnant commodity and crude prices. This would be good for India as imported inflation would come down and cost of infrastructure rollout would drop. However, if global liquidity turns unsupportive again, it would be a big negative for India given our dependence on external capital.

What is your view on commodity and oil prices going forward, and how is this going to impact India?

Our view is that prices will remain benign. Oil production in the US and Iraq seem to be rising though the political risks in Iran next year may cause some volatility. On the other hand, a correction in oil prices will clearly be positive for India. A $10 per barrel correction can reduce the current account deficit by about $10 billion or 0.5 per cent of GDP -- which is quite significant.

Some of the best performing sectors in recent times have been FMCG, pharma and cement. What are the sectors you are bullish on in 2013? What is your Sensex target for next calendar?

We are tactically bullish and overweight on banks (private banks), pharma, cement and mid-caps. We have been looking at rate-sensitive sectors, such as auto, banking and consumer durables, a lot more closely than before. We have also added some cyclicality to our portfolio. For example, we have added a fair bit of cement companies in the recent past. Overall, the valuations in the market are in line with historical averages, and thus for meaningful upside from current levels, the pace of earnings downgrades have to stop and upgrade cycle to begin in a meaningful manner. We remain hopeful and cautiously bullish for 2013.

What are the other immediate risks for Indian stocks for next 6-12 months?

Some of the key risks going forward are policy momentum getting disturbed, early election fears, further delays in investment cycle pick-up, rupee depreciation and external global liquidity situation and affective flow of external capital to India turning adverse. But with the political logjam seemingly on the path to resolution in the winter session, efforts being made to boost investments, fears of a sovereign rating cut somewhat allayed and other macroeconomic pressures (inflation, rates) expected to ease as we enter 2013, the outlook for the near term definitely seems positive. The recent market rally appears to be echoing this improved sentiment. zz



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