What is your sectoral view
We continue to be overweight on consumer staples, healthcare and IT. However, keeping in mind the current macroeconomic environment, we recently downgraded Financials and Industrials to underweight from neutral. We have also upgraded Utilities and Consumer Discretionary to neutral from underweight. Valuations in utility sector are quite attractive as the sector has seen a sharp correction in the last 2-3 quarters. Within consumer discretionary, earnings momentum is decent and export-led volumes have also turned healthy in the last two months. Apart from this, the good monsoons should also support for rural demand.
How are FIIs viewing Indian markets
FIIs turned positive on Indian equities since the beginning of September even before the Federal Open Market Committee (FOMC) meet took place. At the same time, FIIs are exiting from debt markets in emerging economies.
Why have you downgraded Financials
The public sector banks make up a major portion of the banking sector in India. Given the continued slowdown in the economy, these banks are likely to see further corporate debt restructuring (CDR) stress. We expect the PSU bank space to continue to languish. Net-interest margins (NIMs) would continue to be under pressure for the sector. However, within Financials, we continue to like new-generation private sector banks as they are well-placed in terms of credit practices and low-cost deposit base, which would help them negotiate the current pressure. Although valuations in the banking space are attractive, it is not a sufficient parameter to take fresh exposure in Financials.
How do you see the US government shutdown affecting the markets
It will have a mixed implications on emerging markets. The emerging market economies have been witnessing recovery in exports to the developed markets especially to the US in the recent past. The shutdown could slowdown export-led growth as the consumer confidence and other demand drivers in the US would take a beating. At the same time, if the shutdown continues, the quantitative easing (QE) tapering is likely to be further delayed.
When do you expect tapering to start
The US Fed is unlikely to announce tapering in its October FOMC meeting due to the ongoing government shutdown. If it doesnt start tapering in October, it is unlikely to initiate it in December as it would be festive season then. We expect tapering to start after January-end.
What is your current macro-economic outlook
Current account deficit (CAD) is improving. We may see some uptick in gold imports month-on-month for September 2013; however, it appears to be trending downwards compared with earlier months. We expect CAD to fall year-on-year, led by a recovery in exports and lower non-oil imports. The trade deficit is expected to remain at around $12 billion per month. The recent RBI measures to attract external flows are likely to improve outlook of balance of payments. These factors are expected to stabilise the rupee further with appreciation bias towards 60-61 levels in the near-term. Risk to this view is announcement of QE tapering in October 2013 policy meet and sharp global commodity price inflation.
What is your view on overbrought defensive sectors
While concerns have been raised over sectors such as FMCG, healthcare, IT, we dont expect any sectoral shift in the near-term. The high valuations of these sectors are supported by the earnings growth. For instance, ITs average growth year-on-year is 18-20%, while FMCGs average earnings growth is 14-15%. At the same time, under-owned sectors are giving disappointing earnings. Hence, we expect defensives to remain overbought.
When do you see markets making a new high
In 2014, with macro-variables turning supportive, led by stable inflation and currency variables with return of investor confidence in post-election scenario, markets can surge to those levels.