The rupee’s appreciation against the dollar may provide some breathing space for domestic policymakers to address the currency woes and twin deficits, believes Harsha Upadhyaya, head, equity, Kotak Mutual Fund. In an interview with Ashley Coutinho, he says this is a good time to make staggered equity investments, given that valuations are below long-term averages. Excerpts:
What is your outlook for the equity market in the year ahead?
After the recent sharp upmove, the market is now trading close to long-term average valuation levels. Volatility has been caused by patchy macroeconomic situation and global issues. From here on, the re-rating of equities is expected to be gradual, in line with the expected gradual improvement in domestic economic outlook. Otherwise, the market is expected to move in line with expected earnings growth over FY14 and FY15, which is around double digits in CAGR terms.
What is your earnings outlook for the coming quarters?
There was another round of downgrade in consensus earnings for FY14 after the first quarter results. We believe that we are close to the bottom of the earnings downgrade cycle. Although the earnings growth expectations for FY14 are modest at about 6% year-on-year, we expect that to improve moderately to double digits in FY15.
What are the key triggers for the market going forward?
Clearly, all eyes were on the US Fed policy. Contrary to expectations, the US Fed has decided to defer the plan on tapering of QE (quantitative easing) in its latest policy meeting. While the market is likely to exhibit short-term positivity, the focus will now probably shift towards the debt-ceiling issue in the US and uncertainty about eventual tapering, provided the data is supportive. While there is all-round relief that there is no tapering, the risk of future tapering remains. The pace and timing of QE tapering is likely to be critical for emerging market equities in general and more so for Indian equities due to the patchy macroeconomic environment and high dependence on foreign inflows owing to the large current account deficit. It is expected that the domestic monetary policy slated for this week will take the Fed policy into consideration. The rupee has witnessed appreciation with the US Dollar weakening due to the deferment of tapering. This provides some breathing space for domestic policymakers to address the key macroeconomic challenges such as currency movement and twin deficits.
What is your outlook for FII investment in India?
The eventual tapering of QE stimulus by US Fed may moderate flows into emerging markets. However, in the short term, this risk is not there due to the Fed’s decision to keep the tapering on hold as of now. From a medium-term perspective, we believe that India continues to be one of the attractive markets for investment given where the valuations are, and expectations of gradual economic recovery going forward. Despite the slowdown in growth, India continues to have a relatively higher growth rate from a global perspective.
Which sectors are you betting on?
We are currently overweight on sectors such as IT, telecom and auto. The IT industry is witnessing renewed business momentum along with added boost in terms of year-on-year currency depreciation. After years of consolidation, the telecom sector seems to be on better profitability and growth path going forward. The least favoured sectors are capital goods, power, engineering and metals. As we believe that the revival in domestic capex or investment cycle is still some time away, we are maintaining an underweight stance on all related sectors.
What would be your advice to investors at this point in time?
Most investors have either moved out of or have avoided equities in the recent past due to the underperformance of equities vis-à-vis other asset classes such as fixed income, gold and real estate, resulting in a skewed asset allocation. Currently, equity valuations are well below long-term averages. Also, the economic and corporate fundamentals are expected to improve gradually going forward. Therefore, this may not be the time to be underweight on equity. Over the next 3-5 years, equities will definitely outperform most other asset classes. The current range-bound market actually provides a great platform to make staggered and disciplined equity investments to cash in on economic recovery as and when it occurs.