'The long-term outlook for equities remains strong'

Written by Sanjay Kr Singh | Updated: Nov 17 2008, 17:37pm hrs
While the short-term outlook for the markets remains murky, the inherent strength of the India growth story will ensure that those who keep their faith in equities are richly rewarded, says Sankaran Naren, chief investment officer, equity, ICICI Prudential AMC.

Earlier, the estimates for growth of the Indian economy in FY09 ranged from 7-7.5 per cent. Now estimates have been downgraded to 6.7-7 per cent. What is causing these downgrades
The downward revision has been on account of weakening global economic prospects due to intensification of the global turmoil. The growth outlook for India remains positive. However, pressure is expected to some extent on corporate profitability on account of cyclical slowdown due to high inflation and interest costs, tight credit scenario, and global influences.

India will be a gainer as commodity prices correct. With commodity prices declining, and India being a domestic demand led economy, we expect India to outgrow all other economies.

Have we seen the worst of the financial crisis in the West, or will there be more bad news
The global financial crisis could possibly be in its last leg. This has been possible because of the prudent monetary and fiscal measures by governments and central banks across the world. Realising the enormity of the situation, they introduced measures to avoid a big meltdown. Efforts such as capital infusion into banks by western governments, support to money market funds, and guaranteeing of fixed deposits by governments have helped reduce the impact. Initiatives towards improving accounting norms are expected to help further.

What are the positives and negatives within Q2 FY09 corporate results
The Q2 FY09 results were a little ahead of expectations due to the high commodity prices. Remember that the benefits of higher commodity prices accrue positively to many Sensex constituents. The results reflected this. EBITDA growth lagged sales growth due to the impact of higher commodity price that added to input cost pressures in some sectors. However, barring inventory losses in the current quarter, input cost pressures acting as a handicap on margins is a matter of the past for 2009 at least.

How are results likely to be in the remaining two quarters
They are not expected to be very encouraging. The sharp fall in commodity prices could lead to significant one-time inventory related losses to many companies. This will be reflected in the next two quarter results. The current market seems to have adequately discounted this.

We are in an interim phase where prices and interest rates are expected to go down in the future. This is likely to lead to postponement of decision-making on purchases of high-value items. This could moderate growth over the next two quarters. The combination of lower prices and lower interest rates is likely to be extremely positive for 2010.

What are the reasons for metals (68.8 per cent growth in net profit), and telecom (36.2 per cent) posting strong results
Metal companies have posted strong results because metal prices had peaked during the last quarter. Going forward we expect much lower growth due to expectation of a sharp decline in metal prices. Telecom has demonstrated good growth due to domestic demand holding on due to competitive pricing strategies and value-added services targeted at attracting and retaining customers. We expect growth to continue on account of the same triggers.

And why have healthcare (net profit -36.6 per cent), auto (-23.1 per cent) and cement (-30.1 per cent) posted poor results
The healthcare segment has witnessed low growth due to specific companies within the sector showing significant one-time losses, whereas they had posted profits last year. The outlook for healthcare companies is positive on account of stable demand. And they are relatively unaffected by the global turmoil.

Cement has underperformed due to input cost pressures. In future while we expect input pressures to ease, output price reduction next year will continue to keep results subdued.

The auto sector has underperformed again on account of high input costs and high interest rates. With inventory price correction and high current interest rates, the short-term outlook remains challenging. The outlook for 2010, however, looks good. It will be positive once commodity prices settle next year and interest rates come down, thereby increasing demand.

We believe that the rural segment will play a crucial role and help corporates across areas like auto, healthcare, etc by triggering demand.

In your estimate, by when will stock markets begin to move up
Markets are likely to remain range bound in the short term. It is also difficult to predict where the markets will settle. It will depend on how global events pan out and impact sentiments. On the way down, markets are going to discount global uncertainties and FII selling.

On the way up, the markets are going to be supported by sharply reducing inflation, cheap valuation, and domestic institutional interest. The long-term outlook for the Indian equity markets continues to be strong on the back of strong fundamentals, increasing domestic influence, and demographic advantages.

What would your advice to investors be: keep investing or stay away from the markets till the outlook becomes clearer
The correction has made valuations attractive making it an ideal time to be overweight on equity. Considering that the long-term India growth story is driven by the strength of fundamentals and domestic growth triggers continue to be intact, investors should focus on the long-term outlook and continue to invest in the Indian equity markets. We recommend investors to look at investing in large-cap funds like ICICI Prudential Growth Plan and ICICI Prudential Focused Equity Fund that will help them gain exposure to fundamental companies with a strong track record. They could also invest in ICICI Prudential Dynamic Fund that has the ability to provide risk-adjusted returns. Investors should follow proper asset allocation strategy and stagger their investments through systematic investment plans.

The quality of FMP portfolios has become a matter of concern with many funds taking large exposures to real estate companies and NBFCs. What is your take on this
ICICI Prudential AMC has been focusing on maintaining the highest disclosure standards. We are the only leading fund house that has been declaring its FMP portfolio in the fact sheet for over three years. We have also taken the pioneering step of disclosing complete securitisation and pass through certificates in our fact sheet. These efforts are directed towards helping investors take prudent investment decisions based on due diligence.