The Indian stock market has been one of the best performing markets in the world this year and is now among the most expensive in its peer group. In March alone, foreign investors have shopped for equities worth more than $4 billion. With the economy now clearly gaining momentum, Indian companies look set to grow their earnings but Nandan Chakraborty, Managing Director – Institutional Equity Research of Enam Securities, believes the near term cues for the market would come from interest rate movements and the rabi crop. In a conversation with Ashley Coutinho, Chakraborty says the dollar carry trade will have a positive bearing on the Indian market.
What is the short term and long term outlook for the market? Where the market is headed in the coming year?
As far as the very short term is concerned, the market could still rise because of the dollar carry trade. The long-term view for the market is bullish because Indian companies will turn in fairly good ROEs, and there will be consumption-driven growth. The next big phase of infrastructure growth will kick off in the next five-six years. So, the next few decades in India will be as important for India as they were for the US in the previous century.
The medium term (the year ahead) could be somewhat difficult for a temporary period essentially because the dollar carry trade can?t last forever.
What are the local cues that will have a bearing on the market in the near term?
The local cues to watch out for in the next three months are the RBI interest rate hikes and the final output of the rabi crop. Secondly, the progress of disinvestment and the paper supply. Right now, there are no major issues that have been announced in the next three months but if the market goes up then we?ll see many more issues, especially in the realty and the power sectors. Then, of course, by June we?ll get into monsoon forecasting.
What is your view on earnings in the near to medium term?
The Sensex is reasonably valued at the current levels. Our estimates for the Sensex EPS is roughly around Rs 1,000 for FY11 and about Rs 1,200-plus for FY12. So, you can use a reasonable multiple on the numbers depending on your growth prospects and arrive at the Sensex target for the year ahead.
Which sectors do you think are set to do well and where do you see a downside?
It depends on the timeframe. In the long term, capital-thirsty sectors like realty and power will do best. However, in the near term the same sectors are the most vulnerable to any capital outflows from India. In the near term, the urban discretionary consumption sectors like auto, media and retail, which are dependent on domestic consumption, are set to do well. One key reason is the multiplier effect of IT and housing purchases, which have both taken off in the last few months compared to the previous year. The other factor is the growth in sectors like IT and banking, which are hiring a lot of people this year. The number of people employed has a multiplier effect on total spending. Wage increases will also fuel consumption. The central government wages went up last year; this year we?ll see the state government and private sector increasing wages.
Will rising inflation and interest rates be a dampener on earnings and stock markets?
Inflation in India will start peaking off from now on, but everything is subject to global crude oil prices and right now, oil is poised at $80 per barrel. Generally speaking, when it goes much above 80, is when things go bad for India. But that will happen only if the oil price rises due to supply shocks and not because of an increase in demand. If it?s due to an increase in demand, then we won?t suffer as much because capital inflows balance the increased amount of money that we pay for imports. But if it is due to supply shocks, then we are among the most vulnerable in the world.
In India, the rabi crop has been very good and as the harvest reaches different parts of the country, the foodgrain prices should start coming down and the downtrend in inflation should accelerate from April.
Everybody expects interest rates to go up by 25 basis points in the next few months. But I don?t think it will have a great impact on the market. Interest rate (hikes) by itself is not important but taken together with adverse global conditions, it can cause a problem.
Will large-caps outperform mid-caps?
Normally, mid-caps do well under two scenarios. One, when the GDP growth surprises everybody and two, when the large-caps have already grown a lot. Both are happening right now.
Which are the global cues to watch out for? Is the global economy out of the woods yet?
One cue is the US interest rates policy, which continues to be loose. This is the reason why the dollar carry trade is flourishing.
The second cue is about the dollar itself and capital inflows. So far, the dollar index has remained pretty strong because of the Euro crisis. After Portugal, there are now signs that the UK pound is getting weaker. All these factors point to the dollar index remaining strong in the near term. But that is not sustainable in the medium term. India obviously benefits from any US dollar depreciation with respect to the rupee because of the capital inflows. But despite the US dollar going up at present, which is normally adverse for India, India is benefiting as a result of the dollar carry trade.
The CPB Netherlands trade data for February and March is another important signpost. The data for January 10 showed world merchandise trade volumes declining by 0.7%.
Do you think emerging markets like India will be a safe haven for foreign investors?
In the long term, emerging markets will always be an attractive destination because it?s the region where the growth is. But in the short term these markets will always be vulnerable to capital outflows.