The market has been showing strength despite headwinds, according to Saravana Kumar, CIO of Tata AIA Life Insurance. In an interview with Ashley Coutinho, Kumar says that despite the moderation in the Indian GDP growth, overseas investors seem to have kept faith in the long-term India story.
Your outlook for the equity market for the year ahead…
The equity market seems to be consolidating with an upward bias over the last few months as the euro zone crisis seems to be showing a semblance of resolution. We believe that the Indian market is trading close to long-term averages on a one-year forward price earnings basis and does offer long-term investors the comfort of reasonable valuations. Things are better than what they were 6-9 months back. The market has been showing strength despite negatives like global shutdown, weak monsoon, high deficits and policy inaction from the government.
What are the key positives and negatives for the market?
The Indian market has the comfort of valuations at the current levels for a long-term investor. The theme of India growth story is still relevant today as the pillars of the growth story, such as demographic dividend and urbanisation, would remain relevant for decades. Also, global commodity prices will continue to remain soft. But the lack of meaningful structural reforms as well as weak global macro-environment are key risks.
What is your assessment of the first quarter results so far?
The first quarter results indicate that growth in revenues was muted, margins were under pressure, interest and foreign exchange losses hit corporates and working capital intensity of business eroded free cash-flow generations. The results, so far, have been mixed, though they were broadly in line with a weakening trend. Sectors like automobiles and consumer durables are now seeing some moderation in growth, while others like telecom, PSU banks and metals continue to disappoint.
FMCG, pharma, private banks and auto component industry have seen strong growth. There was margin pressure across a number of sectors. Earnings upward revisions have got pushed back, given the slowing growth and lower possibility of any significant correction in interest rates this year.
Do you expect interest rates to decline in the coming months?
We believe that the policy rates would have to reduce further as a response to the sharply moderating economic activity. We could see another 50-bps cut in the repo rate in fiscal year 2013, though the timing of the reduction will depend on the credible steps taken by the government for fiscal consolidation as well as the RBI?s expectations of the growth and inflation dynamic in future. A lower trajectory of interest rates is a key enabler in kick-starting the faltering investment cycle and increasing the business confidence required to revive the stalled private capex cycle.
The outlook on FII inflows…
Despite the moderation in the Indian GDP growth, FIIs have kept faith in the long-term India story and pumped in around $10.5 billion till date. We believe that FIIs would continue to allocate money to the Indian equities as the long-term structural growth story is largely intact and a substantial growth differential compared with other developed markets is maintained. There could be expectations on reforms, including more moderate view on GAAR.
Global cues to watch out for…
We would be tracking the monetary easing efforts of the US Federal Reserve as well as the ECB in the near term. The commentary from the US Federal Reserve increasingly points to a possible quantitative easing programme in the near term as a response to the weak macro-data from the US. The ECB has reiterated its commitment to bringing down borrowing costs in the peripheral euro zone economies and, so, we cannot rule out some specific intervention by the ECB through a bond purchase programme in the peripheral euro zone bond markets. Also, monetary easing in China seems to be on the cards.
What sectors are you betting on?
We remain overweight on FMCG and pharma and underweight on infrastructure and utility. We believe that the Indian consumption story would be a structural theme, given the demographic dividend play. In the last few years, the rural consumption has surged due to better terms of trade for agriculture through higher minimum support prices and an increasing allocation to rural economy through employment generation and infrastructure schemes.
The FMCG sector, though at rich valuations at current levels, does offer a proxy to play the multi-year consumption theme for a long-term investor. However, it is important to keep in mind that companies within the same sector can have very different profiles, so being stock-specific may make more sense.