An increasing number of experts are of the view that the recent run-up in the market is a beginning of a structural bull run...
The clear mandate given to the Narendra Modi government confirms our view that 2014 will be the start of a new bull market. This is Indias moment.
Post the formation of the new cabinet, the market seems taking a breather. Does it reflect any discontent with the government structure
Not at all. It actually gives us a great opportunity to buy.
The market is riding on a lot optimism while earnings upgrades are still to catch up...
No doubt, it would take time for the ground realities to change once policy actions start. Even economic recovery in the US and Europe is led by increased confidence and optimism. Let us take the example of Japan. After Abe was elected, he took actions to revive growth and inflation but the market rallied more than 50% just after him coming to power. So the market always discounts such events and recovery in earnings growth. From a short-term perspective, elevated optimism may be pointing to an overbought market. However, by the end of 2016 we can obtain the earnings growth that it is reflecting, depending on policy actions from the government.
The market rally this year was based on a combination of factors. We've had a good global background, and the only big development that has taken place in the recent past is with respect to Russia. So, BRIC fund managers have preferred to increase their weight on India. Amongst the emerging market universe also India has stood out on a relative basis. India has managed to attract flows, which were not completely India-centric although election-led momentum has also helped.
Which are the three most awaited reforms that could boost the market sentiment
Get infra projects moving, increase FDI in insurance and push through GST & DTC.
There is a growing argument that Indian market has a potential to re-rate. Would it be supported by higher earnings growth
We are of the view that the earnings growth in the calender year 2015 could be somewhere around 25%. Operational gearing in some of the Indian companies is huge; when it is followed by financial gearing, the earnings would show a huge positive impact. Such earnings expansion indicates significant re-rating potential in the Indian market, which is currently trading at about 15 times one-year forward earnings.
A shift from defensives towards cyclicals seems to be underway. Do you think this trend will intensify
We recommended switching to cyclicals back in October 2013. Attractive valuations and relatively lower institutional holdings offered good picks from these sectors. Now you can see that the ownership has changed and rotation from defensives to these sectors is underway. The question is do you chase these stocks yet The next 100 days are quite crucial in terms of what actions the government takes. I think the investors may want to wait for these announcements.
We have a negative stance on Consumer goods, most pharmaceuticals at this juncture. It does not make sense to buy a stock with a P/E multiple of 40 that is offering an earnings growth of 5-10% over the next one to two years, I would rather prefer a cyclical stock which
is available at lower valu-
ation and has great earnings
We are bullish on auto and auto component companies. They would continue to benefit from the economic recovery in the US and Europe and as India starts recovering, the earnings of some of the companies would see a positive push. For IT companies, even as there are chances of further gains, higher valuations give limited picks.
Relative performance of IT, pharma and consumer companies would be inferior than cyclicals. Banks will be part of this switch at some point in time but not currently. What you will see is that PSU
banks will do a lot of capital issuance in order to shore up their ratios. All PSU banks
need huge re-capitalisation. We don't want to own them but on market movement we would want to rent them.
How do you consider PSUs as an investment class Most of these stocks have seen strong gains on hopes of policy changes
Generally, lack of clarity on government policies and inefficient management practices make it difficult to buy PSU stocks with conviction. For example, in the banking sector, there has been no change in the management, and the government control continues to be quite evident. In the oil & gas sector, even if some PSUs are doing very well operationally, the regulatory overhang in terms of subsidy sharing based on crude oil price movement remains. So, there are hopes that the new government could make considerable policy changes related to these businesses. When that happens, we would be more comfortable to pick up these stocks.
There are rising concerns regarding a slow-down in China and the shadow banking of that country. Can any
negative development in
China impact other Asian countries
The problem with China is that it is not transparent, so one can't know when you could get hit. Lately, news of companies defaulting are coming out albeit they are smaller in sizes. So, will they allow any big fall We don't know. But clearly, the equity market is telling you that there is something not right. Interestingly, lately every year we see similar worries crop up about China but since the last four years, no major negative event has happened. If such a development takes place this year, it would definitely have a big impact on sentiment. It would be considered a negative global event and not just an emerging market event. That could impact the sentiment in economies that are exposed to China, including the US, Europe, Germany, and East Asia. So it could be looked at as a threat to the global recovery.
Even escalating tensions in the Russia-Ukraine equation could also turn out to be a key issue for global sentiment. If Russia stops the supply of gas to Europe, then the latter may have to rely on alternatives which is crude oil, in turn impacting crude oil prices. However, the probability of this event taking place depends on what stance Russia continues to take on eastern Ukraine.
The concerns regarding QE3 tapering have been put on the back burner...
More than tapering, the important factor now is when the interest rates will start to rise. So, these concerns may come back when the US starts contemplating raising interest rates. The statistical data from April confirms the US as well as the European economies have started to accelerate. If things continue like this then by September markets may start expecting higher interest rate from the US. As for India, I think the RBI governor would continue to build foreign reserves. Even as the rupee may continue to see healthy gains in the short-term, I don't see it rising towards 55 a dollar mark. Also, as the economy grows, a part of this growth would have to be imported, impacting the fiscal situation.