The Indian stock market could climb back to its higher levels in the months ahead if global headwinds don?t play a spoilsport, says Paul Armstrong, chief investment officer of ING Life Insurance. Armstrong believes India?s premium over other emerging markets is justified because of the country?s strong domestic consumption story. In a freewheeling interview with Ashley Coutinho, he warns that a large part of incremental FII inflows next year may be towards commodity-driven markets (like Brazil, Russia) rather than India. Excerpts :
The market has scaled the 21,000 peak much earlier than what most analysts had predicted, and now it?s on a correction mode. How do you see the rest of the year (FY11) panning out for the Indian equities?
We expect the Indian market to reach higher levels in the medium term. In the near term, we expect the Sensex to consolidate for the next few months when the market would look forward to FY13 earnings after discounting two years of strong earnings growth expectations for FY11 and FY12. There could be some intermediate corrections depending more on global cues.
What are the near-term and long-term headwinds that you foresee for the Indian market?
We believe that the headwinds for the Indian market could be caused more by external factors rather than internal ones. We believe the European debt woes are not yet behind us. Also, the implementation of the recently announced second round of Quantitative Easing (QE2) in the United States could result in greater inflows into global commodities which could adversely impact India in terms of upward pressures on fiscal deficit as well as inflation.
India is one of the most expensive emerging markets around. Do you think the premium over other markets is justified or do you think we are a tad expensive?
India has generally traded at a premium to most other emerging markets over the past few years, though the premium has been expanding in the past year thanks to the relative outperformance of the Indian market. This premium can be justified by the strong domestic consumption as well as earnings growth being witnessed in India vis-?-vis most other markets. However, a further expansion of the premium from current levels may be difficult going forward as a large part of incremental FII inflows next year may be towards commodity-driven markets unlike the disproportionately higher allocation to India that we have witnessed in the past year.
Do you think fundamentals have improved to justify the upward movement of stock markets or is it more driven by liquidity?
Liquidity generally follows fundamentals. India?s relatively stable economic situation as compared with that of many other markets, coupled with the sustained strong earnings growth, has led to a significant liquidity chasing Indian stocks over the past year. This has resulted in record inflows of about $28.5 billion in the calendar year to date.
Which sectors are you betting on and which ones are you bearish on?
Personal consumption (which encompasses several sectors including the FMCG and auto) is likely to continue to show an upward trend. We are also positive on financials and pharma. On a relative basis, infrastructure-related sectors may tend to underperform.
