Easy rate policy and a business-friendly policy regime could take India to higher growth trajectory, says Vinay Khattar, vice president – head research, Edelweiss Securities. Khattar tells Ankit Doshi that this is the time for India to invest in good business models..
Where are the Indian equities headed?
From September 2012 to February 2013, markets ran-up dramatically without any change in the earnings and with GDP numbers contracting, IIP numbers weakening and inflation inching higher. Our sense is that corporate earnings will begin to pickup towards later half of FY14. The expansion in economic data will happen when the rate cuts happen. When rate cuts take place and policy action becomes conducive, order book on the cap-good side will increase and credit growth will pick up. So lot of these data such as IIP and PMI numbers will begin to become increasingly positive. That is when the next leg of bull rally could start.
How long could it take for the economy to come out of the mess and hit higher growth rate?
Historically, it has been seen that it takes 2-3 quarters for the economy to start picking up after sustainable rate cuts. With interest rates cut by 50 bps so far this year, our bet is economic activity should pickup in H2FY14. But there is no guarantee because transmission of rate cut may take time. Some banks increased deposit rates two months back, indicating there is a paucity of deposits. Also, PSU banks are high on SLR. It is a kind of gridlock at the moment. If the RBI cuts interest rates, this gridlock will open up.
What is needed to revive economic growth?
We believe lower interest rates is one of the most dominant factors in terms of driving the economic activity. The other important thing is government must reduce the spending and increase revenue. Providing a stable policy environment could be of big help to the industry. We are seeing a lot of positive actions from the government.
US markets are touching new highs. Could it help the rally in India?
The rally in global markets would be one of the key drivers for Indian markets. US bond market is seeing a lot of unwinding and the money is flowing into other asset classes, including US and Indian equities. We believe this trend will continue, which is highly bullish for global equity markets, including India.
What is your investment theme for FY14?
The best thing to do is look at individual stock and valuations instead of focusing on indices. We advise investing in good business models that are available at reasonable valuations. Banking and financial services space in general is an interesting long-term bet to look at. In addition, investors could look at capital goods and industrials from long-term perspective. In the near-term, IT and pharmaceuticals are interesting too.
