Progress on the reforms front will be key for our equity market to rally from here on, says R Venkataraman, managing director, IIFL (India Infoline). Venkataraman feels FIIs will remain up beat on markets such as India where the government has stirred into action. In an interview with Ashley Coutinho, he says a big positive for the market could be a cut in repo rates early 2013 onwards.
What is your outlook for the equity market in the year ahead, especially in the light of the reform measures initiated by the government of late?
Indian equities rallied on a reform restart by the government, a move which coincided with more quantitative easing by the Fed, Bank of Japan and the ECB. The open-ended approach towards QE3 till unemployment was contained, particularly excited investors. The Fed also promised to keep interest rates low till 2015. In the year-to-date, FII net inflows in Indian equities have touched about $18 billion already. We see FII interest staying up beat in markets where the government has stirred into action ? India, Mexico and Brazil appear to be the favourites.
What according to you are the key triggers for the market going forward?
Progress on the reform front will be the key for the upmove to continue. The market is especially looking forward to clarity on land issues, mining and labour laws. Softening commodity prices will help boost the margins of India Inc. Among other positives, some rupee appreciation is likely once the current account deficit corrects to 3.5% of GDP. Another big positive trigger would be rate cuts by the RBI in the form of CRR in the near term and in repo rates early 2013 onwards (RBI cut the CRR by 25 bps on Tuesday). On the negative side, one has to consider a possible political backlash that can affect the reform process and a further slippage in fiscal deficit in case more welfare measures are taken into consideration in the next Budget.
Will we see downgrades in the coming quarters? Do you see the fundamentals of the economy improving going forward?
Sustained reform action can help lift the business sentiments and start the upcycle. For now, energy bottlenecks, deficits, poor infrastructure and subdued investment cycle are affecting the pace of economic growth. In terms of GDP growth, it is unlikely that there will be a big revival in the near future. As far as analyst downgrades are concerned, the pace of downgrades may slow, given the liquidity binge.
What are the global cues to watch out for?
While equity investors have rallied recently, global growth has slowed in the last few months. In the coming months, one should watch out for structural reforms and unemployment levels in affected nations. For the US, the next event to watch out for is the fiscal cliff that will be hit post elections. Even other nations need to increase taxes and cut spending to rein in deficits. Other events to watch will be a slowing Chinese economy and geopolitical tensions in Asia between China and Japan over the Senkaku Islands.
Which sectors are you bullish and bearish on?
Our approach currently is bottom up. Among large caps, we like Maruti where the worst may be over. Festive demand will kick in, its share in diesel vehicles has risen significantly, production at Manesar is picking up, discounts are peaking and there is an excitement around its newly launched Alto 800. We also like Cairn India, a pure play on crude where valuations are cheap. Talwalkars and Cox & Kings, two industry leaders, which can potentially grow earnings by 30% in the next two years. We like the private banking pack over PSU banks. We also see potential for a mid-cap rally and like the mid-cap cement space, mid-cap IT pack and auto ancillaries. We are underweight on metals, telecom, capital goods and real estate.