Revival of capex cycle key to re-rating of market

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SummaryCorporate earnings may have bottomed out, but a revival in the capex cycle may be needed before re-rating, believes Prasun Gajri, chief investment officer, HDFC Life Insurance.

Corporate earnings may have bottomed out, but a revival in the capex cycle may be needed before re-rating, believes Prasun Gajri, chief investment officer, HDFC Life Insurance. In an interview with Devangi Gandhi, he says the market may get nervous if it fails to see meaningful actions on the reforms announced since mid-September Benchmarks posted more than 20% returns this year. Can this continue next year?

We have had more problems this year than we will probably have next year; so, our view on the market remains constructive for 2013. We know there are issues related to governance, NPLs in the banking system, muted action on the investment side. Even global headwinds including problems in the US, China and Europe are very well known. The question is the whether these problems become bigger, smaller or remain the same. Domestically, there seem to be some constructed efforts by the government for things to be moving on policy front.

On the macro side, weak rupee, high inflation, high interest rates have persisted throughout the year. The worst-case scenario can be that these things continue, which is less likely. Interest rates are most likely to fall this year and we believe people's 2012 anticipation on the interest rate cuts will play out in 2013.

Growth may continue to surprise on the downside, but the market appears to have discounted for growth rates of about 5.5%. In fact, it may be deemed positive as it may take the RBI closer to start cutting rates. The limitation that may come at this juncture is from the point of valuation. Today, valuations are very close to the long-term means. My sense is that this is not the market one would want to stay out of.

Do you think earnings downgrades have bottomed out?

Corporate earnings seem to be stabilising as there are not many downgrades happening. While the downgrade cycle may have bottomed out, upgrades do not appear around the corner as yet, but may start improving over the next twelve months. The capex cycle is still weak. A revival in the capex cycle would lead to re-rating of the market.

Which are the key overhangs for the market?

The key variables to look out for are the ones that can affect the domestic earnings, the first being crude oil prices. Secondly, if inflation fails to come under control, it would limit RBI's flexibility to deliver rate cuts.

And lastly, if the signs

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