Given the macro-economic factors, what is your take on the equity market
We have been talking about a range-bound market with a downward bias and it has been that way for some time now. The reason is that we have seen some deterioration on the fundamental factors like GDP growth coming off even while inflation has remained high for almost two years now. These factors have led to tight money conditions thereby capping the upside even though we saw periodic flow of money coming in from FIIs. The trend witnessed is that market is getting support at lower levels due to attractive valuations and, at higher levels it gets capped because of weakness in GDP growth and economic fundamentals. The investment climate continues to remain weak. There has also been a slowdown in earnings growth. We already saw the Nifty touching 5500-5600 levels on the upside and around 4600-levels on the downside and we believe we will trade in that range. The second half of the year could be better than the first half but that would be a function of two factors developments in Europe on the global front and policy action on the domestic front.
RBI, against a wide consensus on the street, kept rates unchanged. Your comment
RBI in its earlier policy meeting had cut the repo rate by 50 basis points as against the expectation of only 25 basis points. At that time they had indicated that further rate cuts would be difficult until we see some serious policy action on the fiscal front. Not only that, the currency has depreciated by almost 10% in the last 3 months raising fears that it would stoke inflation. This has possibly caused the central bank to stay away from doing any more rate cuts. Given the tightness in banking liquidity, moderate CRR cut would have helped.
How is the depreciation in rupee affecting the market
Too much volatility in the currency is not good for any country and especially if you are losing value in a significant manner. It is inflationary in nature as it makes imports expensive. On top of that, when the rupee is depreciating we are unlikely to get capital inflows. However, sectors like IT, pharmaceutical and automobile stand to gain due to the depreciation in the Indian rupee as their fortunes are partly linked to exports. We need visibility of stability in currency if we want foreign inflows to resume in a big way.
What is needed on the domestic policy front
What we need is some kind of policy consistency from the government. There should be no back and forth movement in policies. For instance, there should not be constant revisiting of the tax laws. Secondly, there is a need to fast track projects that are stuck for want of environmental clearances or otherwise. This is required to bolster the sagging investor sentiment. Moreover, the government needs to demonstrate that they can also take some unpopular decisions like raising diesel price, etc.
How has been the insurance sector looking at equity investments
Insurance sector flows have also been affected partly because of weak sentiments and partly because of some regulatory changes that happened in 2010. Also the mix of flows has changed in favour of traditional products. While we still get more money in ULIPs compared to traditional products, the mix has changed quite a bit. That has impacted the flows into the stock market as relatively smaller percentage of the traditional fund is invested in equity. This explains muted flows into the equity markets from the insurance sector.
Which are the sectors that you are bullish on. Also, which one are you cautious on
There are some sectors on which we have been historically positive and they form a part of our portfolio. One is the private sector banking. It is a play on the fact that credit growth moves faster than GDP growth and the private sector banks would continue to gain in market share. We are also positive on the consumer discretionary and pharmaceutical space. We are slightly cautious on the IT sector even though rupee is depreciating as we are seeing a slowdown in their business. We are negative on capital goods as the investment scenario in the country has worsened in the last few years.