Indian equities could face yet more turbulence in the near term if the situation in Europe gets murkier, says Apoorva Shah, executive vice-president & fund manager, equities, DSP BlackRock Investment Managers. However, things look favourable over the medium term as commodity prices come off and GDP growth in China slows, he says in an interview with Ashley Coutinho.
What is the outlook for Indian equities?
There may be some concern in the near term for Indian equities if the situation in Europe gets murkier. We could also get into trouble if inflows from overseas investors remain muted or turn negative as we have a high current account deficit.
However, things look favourable over a medium term of about three years. The world economy is slowing and the consumption of metals and oil is falling. We have seen a 10% fall in global crude oil prices this year, which is a positive for India as it is a large importer of oil. But we need to see another 10-20% fall in prices to feel comfortable. Then, GDP growth in China is projected to slip to the 7% levels for the next five years, which could drive down the demand for commodities. Back home, one can hope that the government will use the Aadhaar scheme to ensure that the subsidy reaches the people it is intended for. The government is also laying a framework to auction spectrum and coal resources, which can help it raise money.
Are earnings downgrades likely in the coming quarters?
We might see some downgrades. India Inc had expected a steady decline in interest rates during the course of the year. This had led to the belief that the demand environment would improve on the back of falling interest rates. Those hopes have been dashed. Given the weak currency and sustained inflationary pressures, the RBI is unlikely to go aggressive in cutting interest rates in the coming months.
Companies that are highly leveraged, particularly in the infrastructure space, could see downgrades. The banking sector has issues about asset quality and the slowing economy could hamper credit growth as well. Sectors, such as IT and pharma, might see some earnings upgrades as they will benefit from a weak currency.
What are the problem areas for our economy?
We are a one-legged economy. A balanced economy has two legs ? one of consumption and the other of investment. At present, 60% of India?s GDP growth is driven by consumption and there has been a substantial slowdown in capital good investments owing to regulatory issues. Most corporates today would rather invest globally than in India to avoid the hassles at home. The government?s inaction on the policy front is not helping matters either.
What is your outlook on FII inflows this year?
We are going through cycles of panic, despair and pump priming. The markets rallied in January, February and March owing to a surge in global liquidity. There was extreme optimism during the period, but we are now again moving towards some kind of a panic situation. Money may flow out in the short term, but, given the fact that we may see yet another round of liquidity infusion globally in the days ahead, it won?t be long before fresh inflows trickle in.
Do you see the global situation improving?
Europe remains the problem child. The authorities are trying to ensure that there is no repeat of another Lehman-like crisis. So, they will resort to printing more money. Instead of focusing on implementing austerity measures, Europe must try to create more jobs and rev up demand to spur their economies. The US, on the other hand, seems to be doing far better than Europe right now as its housing market has revived and its energy sector is doing well because of the shale story.
What is your advise to retail investors?
Retail investors should allocate a certain portion of their wealth in equities to beat inflation. They should look at a medium-term horizon of at least three years, instead of eyeing short-term gains. There are quite a few equity products that have given decent returns over the past three years despite the numerous headwinds faced by our equity market.