Market valuations is a function of flows from foreign investors, says R S Sreesankar, senior VP and head, institutional equity, at Tata Securities. In an interview with Muthukumar K and Devangi Gandhi, he says that the PE multiple tends to expand with more inflows and vice-versa. And with strong growth rates seen for Indian economy, flows will eventually come back as inflation cools off, he says.
What is your earnings outlook for the June quarter?
More than prices of metals, prices of raw materials are more important today. In fact, some of the input cost have gone up very drastically. While the effect of this jump would depend on company’s inventory policies ( FIFO or LIFO) still invariably there is going to be a challenge on that front. However, we believe that market has already priced in these challenges. We do see Q1 numbers posing some challenge however we do not expect any significant decline in the topline growth.
Are domestic equity markets fairly valued?
Valuations for the market in general has seen a higher impact of liquidity in the system. In a scenario of higher liquidity and low inflation, the PE multiple generally tends to expand due to an impact of the ?impulse purchases? by investors. In a lower liquidity and high inflation scenario however, not only the valuations but also the volumes (market activity) contract. The obvious example for this theory is share price movement in the valuations of the infrastructure companies. They are generally valued by a DCF method of valuation. Because the discount factor has moved up in this high interest rate scenario, the valuations of these stocks have come down drastically.
Over the short term, the valuations are expected to be led by earnings expectations but once the liquidity returns to the market there could be a premium attached to it.
We expect inflation and crude oil prices to start moderating over the medium-term which will bring back liquidity into the market at a faster pace. The simple reason being that there are not many economies like that of India that are growing at a 7.5-8% per annum.
What do you think are the key concerns regarding India for global fund managers besides inflation?
The point is that India is not as resourceful as countries like say Brazil, China and Russia. If we look at the emerging market spectrum, amongst the larger economies, market of countries like India and Korea which are net-importers of crude have always felt a negative impact of higher crude oil prices. On the other hand, markets of Russia, Malaysia, Indonesia performed better since they did not face a fiscal problem like us.
What are the key concerns for global equity markets?
All markets including emerging markets have a challenge of how the Greece, Portugal kind of situations are handled and their repercussions.
Given that emerging markets continue to play a bigger role in supporting the US current account deficits, there always lies a worry of being affected; however non-exporting economies aren?t totally immune.
There are still doubts being raised about the pace of growth recovery in the developed economies since the recent surge in inflation there is not due to wage increase. Increase in inflation which to a great extent not due to wage inflation tends to affect savings significantly, adding to the slowdown.
Hence, certain segments of the industry which are dependent upon the discretionary spending in countries like the UK, the US and Germany are going to get affected.
This in turn back home could affect export oriented companies from industries like textile, gems and jewellery whose share prices today also reflects such concern. Manufacturing companies with a substantial exposure to such market are expected to be affected by a decline in the pace of growth in such developed markets.