No sooner did Federal Reserve make announcement of QE2 measures, global commodity prices have been inching higher, with oil prices already at two-year high. ?Money flows where the returns are? reasons Vetri Subramaniam, head-equity funds at Religare Mutual Fund in an interview with Chirag Madia and Muthukumar K. While he is gung-ho of QE2 improving inflows for emerging markets equities including India, he is cautious of its implications on real Indian economy. With inflation threshold already above comfort levels, he feel higher oil prices could worsen fiscal situation and impact Indian economy. Excerpts:
How could QE2(Quantitative Easing) affect Indian markets ?
The second round of Quantitative Easing of $600 billion was marginally more than that of market expectations. Over the shorter term, Fed?s move is to impact global financial markets, if not on the US real economy. Fed?s hypothesis is that things would have been worse without QE1 measure. So they are doing it again expecting to revive the US economy. But money flows where the returns are. Therefore it might just end up chasing more of commodities or emerging markets equities rather than affecting really US businesses and encouraging them to hire more people. Apart from that, there is also threat of inflation with implications for Indian markets, given that higher oil prices does impact Indian economy.
So on one hand, while QE2 could bring more inflows pushing Indian valuations further, there is also the risk of commodity inflation affecting its real economy. Today?s inflation is well above central banks threshold in terms of comfort levels; they have talked about bringing it down by March. But in the last two months, commodity prices have only gone up quite dramatically globally.
How does the overall September corporate earnings look so far ?
If you look at the aggregates, it is in line with expectations. However, aggregates this time is misleading, if we go below the surface, as we are finding surprises being widely dispersed in both the directions. Within a particular sector, there are one set of companies which are beating the market expectations significantly on the upside. Then, there are also some companies which have missed earning estimates the other way. So far, Nifty earnings growth is around 15-16% y-o-y, but as I said upside downside ratio are very skewed this time. Therefore within a particular sector, stock level performance have been very disbursed.
Any broad business trends visible from the earning numbers ?
In the last six to eight quarters, economy went through periods of ups and downs affecting some businesses. We have now moved into an inflection point, where companies now have to deal with the new environment, be it on the margin front or that of demand. This is the reason we have seen very different earnings numbers coming through this time. Companies fundamental are playing much larger role right now and those with stronger fundamentals have executed their projects better this time.
Which are the sectors your are bullish and underweight on?
We are bullish on the domestic consumption space, which is expected to do well over the next 5-10 years. With strong GDP growth, income level of people grows and we are looking at where they spend it and how they save it, so that we could look at companies which are benefiting from such robust GDP growth. The challenge is that valuations of such stocks have also moved-up. So it is not so much about the attractiveness of the theme, but on which stocks you can afford to buy at this sort of valuations. Currently, we are underweight materials, infrastructure and engineering sector. But we have also bought some of these companies, not because of its attractive macro fundamentals but for its attractive valuations.
What returns could investor expect over the next one year ?
Market is currently trading at a price-to-earnings multiple of 7.5 times its 12-month forward earnings, which is similar to valuations quoting a year back. This shows that market has gone up only in line with growth in earnings of 20%. But at 17.5 times, we could argue that its not most attractive level of valuations. Going forward, over a five years period, one could expect a earning CAGR of over 15% from India Inc.
Any risk to watch out for ?
I think ?global macro? is a risk to watch out for over the next six months. In the last 12 months, global risk and in general volatility was down. Yet, correlation between global equity markets and our equity markets remains fairly high. This a source of risk, which could be upside or downside. Our sense is that in the next 6-12 months global macro might play important role that it did in the last six months. In the last 6-12 months, stock picking worked very well without having to worry about the macro. But, that will be not the case in the coming months. Apart from that we have to look at local inflation.
Will foreign institutional investors (FIIs) continue to remain overweight on India ?
Its difficult to predict. I think there is a reason to believe that we will continue to witness supportive inflows from FIIs, but its also a fact that we have seen very disproportionate of inflows that have gone into Asia this year. If we exclude Japan and China, 50% of the Asian flows have come into India, which is far more than the usual share that India has received in the past. So one could expect some volatility in inflows down the line.
Many India-dedicated funds are branching out of emerging or Asian market funds ? How do you look at the trend ?
Our sense is that, in the last one year, two trends are discernable. Firstly, we have seen lot more money coming through India-dedicated ETF money. The activity though in has not been at the higher levels seen in 2006 or 2008. In fact we are witnessing more of global market funds allocating some portions of its assets to India.
