Policy framework is one of the crucial triggers that could drive the Indian market says Vikas Khemani, president and head, Institutional Equities, Edelweiss in an interview with fe?s Devangi Gandhi. In an interview he says that peaking interest-rate cycle along with the pace of the government?s policy actions could boost the confidence in the Indian equity market.
How is the June quarter shaping up so far? Can earnings downgrade continue this quarter?
So far most of the results have been more or less in line with expectations. Pharma and private sector banks have done as expected. IT results have not posted any negative surprise and guidance has been conservative. In general, expectations are not very high so we may see less surprises on the negative size. However, the critical portion for this result season would be the earnings of PSU banks and Oil & Gas biggies. Our Sensex EPS target for FY12 is R1220, lower than the consensus and with a risk of a downward revision. The crucial factor would be the June quarter results of the banking sector especially the PSU banks. We do see a high likelihood of downgrades till the September quarter due to the effects of high interest rates.
What is your view on interest rate cycle and commodity prices?
The 50 bps rate hike is likely to result into a demand slow down and have a definite impact on investment activity. RBI?s attempt to control consumption-led inflation is already fructifying in the form of a slowdown in auto sales and stagnant real estate prices. These developments reinforce our view that the interest rate cycle could peak soon. We expect oil prices to settle in the medium to long-term at about $90-100 per barrel. Other hard commodities may also see a softening in prices given that global demand is under pressure due to slowdown in the developed as well as some of the emerging market economies.
How do you see the Indian market positioned for the second half of 2011?
The global risks in our view are underestimated and can have a fierce impact if liquidity gets affected by a further worsening of the Eurozone debt crisis. Barring that, the market is looking towards two triggers that can drive it from this point, namely, a peak in interest srate cycle and clarity on the policy framework. One has to keep in mind that we did not have a significant outflow which indicates that India has not lost its attractiveness yet. We are likely to see a rise in FII allocation the moment some clarity develops on some of these issues. While it may be difficult to time it exactly, the risk-reward giving appears to be attractive at this juncture given that market valuations are also at its long-term averages.
Given the market-wide expectations of a peaking interest-rate cycle, are we likely to see a shift towards interest-rate sensitive sectors among investors?
In the last one and half years, all the consumer stocks have done very well to the point that we have seen excessive optimism getting built up and such stocks trading at very high valuations. Most long only funds are currently overweight on FMCG stocks and underweight on infrastructure and real-estate stocks while banking stocks are assigned either equal or overweight. This composition may see a dramatic shift once the interest rates start to taper off and a lot of these portfolios get adjusted towards interest-rate sensitive stocks. Currently sector-wise, we are equal weight on banking and oil & gas and specifically overweight on some of the utilities stocks. We were underweight on Infra so far but are looking to re-rate the stocks to equal or overweight. While we have been overweight on consumption ? led stocks, we are thinking of moving out of that space incrementally. We are ready to align our portfolio towards interest-rate sensitive sectors over a span of next two quarters.