The market is neither cheap nor expensive at the current valuations, believes Sanjay Dongre, senior vice-president & fund manager, UTI Mutual Fund. Dongre says that India?s share of problems looks small in the global context. In an interview with Ashley Coutinho, he says that SIP is the best way to benefit from the volatility in the equity market.
What is your market outlook for the coming year?
The recent government measures, such as fuel price hikes and increase in FDI in multi-brand retail and aviation, have boosted sentiments. Reforms like raising the foreign investment limit in insurance and pension will also add to the confidence. Interest rates are expected to decline in the next 12 months. There are expectations that interest rates in FY14 will be at least 100 bps lower than what prevailed in FY13. That?s a significant change. Interest cost is a good portion of the Ebitda of a number of small companies. So, a decline in interest rates will add to the earnings growth of these companies.
Global commodity prices have cooled off in 2012 as growth in China has slowed and both the EU and the US are growing at abysmal rates. This will bring down the raw material cost for companies, which will add to their margins.
Now that the market has moved up substantially, has it become a little expensive?
Despite issues surrounding GDP growth and inflation, India looks a lot better compared with other markets, say, the EU or the US. While the market may have moved up about 26% in CY12, it is still quoting at about 14.5 times forward multiple, which is exactly the average valuation of the last 5-10 years. The market is neither cheap nor expensive at these valuations.
Have earnings downgrades bottomed out?
One must remember that there have been consistent earnings downgrades in the last 7-8 quarters. However, margins of these companies stabilised in the quarter ended September 2012, though revenue growth declined. So, even though the total earnings growth was in single digits, stable margins have been the comforting factor. We seem to have reached the end of the downgrade cycle and seem to be bracing for earnings upgrades in the coming quarters.
Global cues to watch out for…
In the near term, the actions taken by the ECB have more or less taken care of the issues faced by the peripheral countries in the euro region. But what will be interesting to see is how things pan out in the medium-to-long term.
It remains to be seen whether these countries adhere to the fiscal reduction measures that the ECB wants them to undertake. If these countries don’t adhere to the set targets, the liquidity support provided by ECB may be withdrawn.
The US Fed seems to continue with QE3 with monthly assets purchase of $85 billion. The US economy seems to have avoided the fiscal cliff, but growth will be impacted in the near term. However, growth is expected to come back to earlier levels in the latter half of the year.
FIIs shopped for equities worth more than $24 billion in 2012. Will the inflows continue?
Although India has its share of problems, they look pretty small in the global context. What the FIIs have sensed is that the government is now finally serious about bringing in reforms. However, considering that 2014 is an election year, it will be important for the government to ensure we get back on the growth track this year.
Sectors you are betting on…
There are two worlds out there in the market. One world is quoting at five -year high valuations and the other is quoting at five-year low valuations. Sectors like FMCG and pharma belong to the first camp, while some of the cyclical sectors belong to the second camp. Going forward, the decline in interest rate will add impetus to the cyclical sectors.
Your advice to retail investors…
One always needs to have some exposure to equity depending on the risk appetite. There is no point in timing the equity market simply because nobody has been able to do it in the past. The best way to invest in equity is through SIPs. Last year, the buzz was that the equity market would not give any kind of returns. If you had listened to this kind of advice, you would have missed the rally of more than 26%. SIP is the best way to benefit from volatility in the equity market.