Rate cut hopes, GAAR deferment spell good news for equities in 2013

Written by Ashley Coutinho | Ashley Coutinho | Updated: Jan 17 2013, 06:08am hrs
Expectations of rate cuts in 2013 and deferment of GAAR by two years spell good news for Indian equities, believes Nirmal Jain, chairman, IIFL. Jain says the governments disinvestment initiatives could play a part in reviving retail interest. In an interview with Ashley Coutinho, he says central banks across the globe are helping markets with financial stimulus.

Indian equities rose more than 26% in 2012. What is the market outlook for 2013

Indian equities fared well during the latter part of 2012 because of renewed government vigour on policy initiatives, following fears of sovereign downgrade and global liquidity easing on account of QE3 and Fed announcement to check interest rates till 2014-15. Looking ahead, we believe the government will maintain its pace of policy action given the downgrade fear. This augurs well for the economy and the bourses. With better expectations for global GDP growth in 2013 and benign global inflation, liquidity will remain easy and will eventually find its way into assets. In January itself, Indian markets have witnessed net FII inflows to the tune of R8,700 crore. Factors like peaking of the interest rate cycle and expectations of rate cuts spell good news for equities. In calendar year 2013, we expect domestic interest rates to soften by at least 150 bps. The deferment of GAAR by two years will further boost business confidence in India. The reasonable valuations and waning earnings downgrade cycle gainfully support a possible 10-15% upside on the Nifty in 2013.

What are the key positives and negatives for the market this year

On the positive front, we have seen good portfolio flows into India. Policy measures have been upbeat, especially those that would help curtail fiscal deficit. Steps taken by the government on the reform front have been positive. Deferment of GAAR and interest rate cuts has also had a positive effect. On the flip side, fiscal deficit continues to be alarming notwithstanding the recent government measures. Welfare spending, if announced during the coming Union budget, and decelerating GDP growth could add to the woes. The current account deficit is another concern given suppressed exports and stubborn imports despite depreciated rupee levels.

There are indications of a rate cut later this month. How do see the movement in the interest rate cycle this year

The interest rate cycle appears to have peaked out. Close on the heels of two CRR cuts, we expect a 25 bps repo cut in RBIs January policy review meet. Going forward in 2013, the stage seems set for a 100 bps reduction, though this could be limited to 75 bps if inflation is not kept in check, especially following moves like delink of fuel prices. Much will depend on how the ruling government tackles inflation. If the government gets its priorities of industry impetus, investment spends and fiscal consolidation right, RBI will be in a much better position on the interest rate front. Given its recent moves, RBI seems resolute to keep inflation the primary focus of monetary policy. If RBI and the government work hand in hand, we could ensure a conducive investment climate to drive sustained growth in the medium-to-long term.

Will retail investors return to the market this year

Given the positive outlook for 2013, we expect retail investors to come back to the bourses. Among other things, launching fundamentally sound IPOs at attractive valuations are one way to motivate retail investors. The governments disinvestment initiatives could also play a part in reviving retail interest, if priced correctly. The regulators initiatives on safeguarding retail investors, especially during IPOs, will help build confidence to a large extent.

What are the global cues to watch out for this year

The momentum of FII inflows into India will be dictated by global cues. A large part of Europe continues to be driven by austerity measures. The US economy, though still debt-laden, has shown signs of recovery. The central banks across the globe are helping markets with financial stimulus. The developments on this front and the pace of recovery of the global economy have to be closely monitored. The fears of oil price choking any recovery have lessened with the increase in shale gas production. Events in Europe might also cast a shadow over India.

The last two years have been tough for brokerages. Do you see things turning around

The broking industry is facing difficulties because of lack of retail participation in the cash segment. Exchange volumes are dominated by options trading and brokerage rates are falling, which is putting further pressure on margins. Technology in the form of DMA (direct market access) is affecting the institutional broking industry. As markets revive, we expect retail participation to come back and cash volumes to pick up, which augurs well for this sector.

How has diversification helped you as a broker in the past year or so

We have been able to negate the impact of decline in the broking business because of our NBFC business which has held steady traction. Businesses such as wealth management and financial product distribution are also doing well.