The Sensex and the Nifty do not reflect the real slowdown in the Indian economy, believes Ritesh Jain, CIO, Tata Asset Management. In an interview with Ashley Coutinho, he says tight liquidity in the near to medium term may impact cash-strapped corporates and that earnings downgrades will continue for a large part of the market. Excerpts:
Equities have been volatile of late. What is your outlook for the year ahead?
The equity market has still not priced in the growth and earnings slowdown. The midcap index, which has lost more than 20% in the last six months, is probably a more telling state of the real economy. Sensex and Nifty do not reflect the real slowdown as FMCG, Pharma and IT are still holding on. In this kind of demand slowdown and hostile external environment, the broad markets are expected to remain under pressure. Companies that have undergone cost rationalisation, have strong cash positions, earnings visibility and leaner balance sheets are expected to remain market leaders.
How will the sustained weakness in the rupee impact the market?
The rupeeís weakness is the biggest risk to Indian equities. A sustained weakness in the INR will further aggravate the current account deficit problem. The currency weakness will manifest in rising inflationary pressures as both input and output price rise. Such a scenario may compel the RBI to run a tighter monetary policy or even hike interest rates, severely impacting domestic growth. Tight liquidity in the near to medium term may impact many cash-tight corporates, further impacting the capex cycle. A system-wide asset quality issue in the banking system may aggravate and start a vicious cycle. Besides liquidity, worsening government finances in a pre-election year and global factors will play on the market sentiment.
Are there any positives for the market going forward?
The biggest positive for the market in the near term will be the moderation in oil prices, slowdown in gold imports and the resultant reduction in trade deficit numbers, which, in turn, will support the rupee.
A good monsoon is expected to add to the disposable income of rural India and ease food inflation, which would help sustain consumption demand. Higher agricultural growth is expected to have a multiplier effect on the overall GDP growth. Also, the stress of the last 4-5 years has forced corporates to clean up their balance sheets, restructure and embark on cost cutting measures.