Rakesh Arora, MD and head of research at Macquarie India, says given the macroeconomic headwinds, markets will consolidate somewhat before rallying. He tells Samie Modak that FII outflows may not be as severe as perceived.
The markets are down about 10% this year. Do you think valuations are attractive at current levels?
Valuations look much more reasonable now than they did a few months back. Sensex is trading at a forward multiple of around 14.5x consensus earnings estimates for 2011-12, which is in line with its long-term average. Also, many good quality stocks look attractive from a valuation perspective after the recent correction. We think markets will consolidate at these levels before making an upmove in the second half of the year.
What are the headwinds that the market faces?
The factors that led to the correction have been predominantly inflation, interest rate hikes, fund outflows, investment slowdown and the political situation, which now seems to have been adequately factored in. However, any further negative surprise in the form of an oil price shock or a prolonged stand-off between political parties on the demand for a JPC could again weigh heavily on the market. Other than these, we would keep a close eye on analyst earnings revisions for any significant downgrades.
Do you think foreign investors will continue to take money off the table?
FIIs have pulled out only $1.5 billion of the $29 billion inflows we saw last year. However, given 15% correction in the market and also the depreciation of the rupee, FIIs are already down 20-25% from their peak. This, when seen in context of a sharp increase in some of the other emerging markets like Korea and Taiwan, highlights the underweight position of India. Hence, we don?t think that FII outflows will be as severe as generally perceived. We are already beginning to see investors enquiring about quality ideas post this short and sharp correction.
What are you telling investors?
What we had highlighted to investors was that initially we will see correction because of the above mentioned issues. But eventually the India growth story remains intact and 8% GDP growth is largely unparalleled in this global world. There are hardly any economies which are growing at that kind of pace. So, the interest has to come back to this market and while fund flows may not be as robust as last year, we may see buying interest coming back in the next couple of quarters. We are looking at a target of 22,000 by March 2012 for Sensex.
Which sectors are you are bullish on?
We are bullish on the global recovery theme, and metals, energy, IT and healthcare. We are neutral on capital goods and infrastructure due to execution worries. We are underweight on discretionary consumption sectors like auto due to rising petrol and input prices.