Local challenges like policy inaction, corruption, inflation and tightening of interest rates have kept inflows from foreign institutional investors (FIIs) subdued. Krishna Kumar Karwa, managing director of Emkay Global Financial Services, in an interview to FE’s Saikat Neogi says that if these concerns are not addressed and if valuations are not attractive enough for FIIs to take additional risk, they may continue to be cautious on India despite the long-term attractiveness. Excerpts:
We are seeing a sharp correction in our markets. Do you think the Indian markets are fairly valued or cheap?
At R1,190 of FY12 Emkay Global Financial ServicesConsensus EPS, the Sensex companies are discounted at nearly 14 times. This is not expensive. However, there are certain global and domestic risk factors that can drive the market to lower levels. Having said that, one has to note that interest rates are not going to remain high perpetually and once India gets into the growth momentum, the market will start moving northwards. According to me, for long-term investors with an investment time horizon of three years-plus, it?s a good time to accumulate select stocks at all declines.
Is there an opportunity for India in the slowdown in Europe and the US?
India is a good growth story as against the developed economies. Even in the midst of the current slowdown, the GDP still remains around 7% as estimated by most experts. One can say that, in most optimistic times, India grows at 8-9%, while, at all pessimistic levels, we could be around 6-7%, which itself is quite reasonable. The US and European countries are at present struggling with negligible GDP growth despite minimum interest rates. In a situation where there is a slowdown in the global economy, India is definitely well placed as an investment destination among emerging markets.
Do you see any similarity between the market crash in 2008 and now in terms of markets behaviour?
We witnessed a bloodbath in 2008 across global markets. The lessons of 2008 have enabled economies across the world to tackle the current situation in Europe. However, the question is till what time will the bailouts in the euro (area) continue? Also, there is a risk of change in the constitution of the euro zone. Besides this, the US economy?s data still remains gloomy. Despite two quantitative easings, the markets still expect another such concession. Even though stocks and commodities like gold have moved up on all QE announcements, the ground level numbers on unemployment, GDP, retails sales, etc, in the US still remain worrisome. Financial markets are integrated worldwide and are sensitive to all such events. The chances are that there could be some event that could damage the current equation.
Many central banks have already actively started taking preventive measures. Corporate balance sheets, locally and globally, are far superior today than in 2008. There will be challenges in case of a sovereign default in the euro zone; however, the regulatory authorities and corporates have the benefit of hindsight to be able to tackle the crisis more effectively.
Which are the sectors that are looking good or those that need to be avoided?
In a challenging global and local environment, it is best to be stock-specific with a focus on management track record, balance sheet strength, reasonable growth visibility and reasonable valuations. Investors should also be realistic on return expectations and have sufficient patience. Defensives like pharma and consumers have had a very good run in the last few years and investors need to be careful on their valuations. Financials, infrastructure and capital goods stocks have taken a beating for obvious reasons. Investors with sufficient time horizon and ability to average should look to invest in the top stocks in those sectors. Agri-inputs continues to perform well with reasonable valuations.
Do you see any downside risks to markets from the current levels?
I believe that the market will be very choppy during the next 3-6 months. In case of any major global mishap, the market can correct from the current level. We need to accept that our markets are a function of FII flows, which are as much a function of local valuations as of global risk-on, risk-off. The strength of the domestic economy and current reasonable valuations should act as reasonable cushions in the event of a global sell-off. We should continue to hover in a 10%, plus-minus, range for the next few quarters.
India has been one of the worst-performing markets in the 2-3 months. Is it a good opportunity to buy?
We have witnessed a period when the Indian market was decoupled when the global markets surged and coupled whenever the global markets fell. High commodity prices, surging interest rates and policy inaction are the variables impacting corporate earnings and valuations. It is difficult to predict the exact time-frame when these challenges will be surmounted. But as long as investors are focused on strong managements with robust balance sheets and reasonable valuations, they should make decent returns in all environments. I nvestors in Indian equities will have to be mentally prepared to look to make returns despite the global turmoil and focus on stocks with macro factors only as the background.