The markets will move sideways unless reforms come in quickly and are implemented, Lalit Nambiar, senior VP & fund manager (equities) UTI Mutual Fund told Ashley Coutinho. Depending upon political leadership to deliver flawlessly is fraught with risk, says Nambiar. Excerpt:
What is your outlook for the equity market in the year ahead, especially in the light of the recent reforms?
In all likelihood, the markets will move sideways unless reforms come in quickly and are implemented fully. Also, global issues have not been sorted out. At least until elections, we will witness a lot of volatility. Let us not forget that the fuel price hike is inadequate, there are tough decisions to be taken on the fiscal front and the government is already in minority. So, while I would love to be optimistic, if history is any guide, depending on political leadership in India to deliver flawlessly is a bit risky.
What are the key triggers for the market going forward?
On the positive side, there is a possibility of liquidity inflow on the back of QE3 infusion, reforms from the Indian government and further softening of crude. However, the government is in minority and may fall or the reforms may lose steam. If we do not move fast on the fiscal front, sovereign rating may be downgraded to junk status.
What is your assessment of the first quarter results?
The results have been on expected lines but there are companies that have taken costs from the P&L into the balance sheet. So, while there may not be more EPS downgrades, the quality of earnings may continue to deteriorate.
Do you see RBI cutting rates?
It is not that the corporate sector is finding the cost of borrowing too high. Investment is stuck for lack of facilitative policy moves by the government and a general overhang of uncertainty in the policy environment. Banks are already sitting on some major potential NPAs and are circumspect on lending to all corporates below the AAA grade. There is also the crowding out effect of a large fiscal deficit. A lot, therefore, has to be done by the government. RBI possibly realises that cutting rates will not help much, and it may especially not want to move on this immediately as inflation is still likely to remain high for some time.
What are the global cues to watch out for?
I think if the Spanish government bond yields start climbing, then the EU measures would have fallen short of assuaging market fears on Europe. Also, QE3 has resulted in euro appreciation, which is not good for the European Union hoping to devalue its currency to help pay debt. Also, the situation in China needs to be monitored as it will to a great extent decide the fate of crude oil.
What are you bullish on?
A company that has a strong brand franchise or where the slowdown actually plays to its strength, allowing it to squeeze competition, implies that EPS growth is reasonably secure. The more obvious cases happen to be in defensive sectors and the valuations in some of them have got bid up due to this relative attractiveness of earnings. However, there are such opportunities even in cyclicals where P/Es are not as steep and in Pharma and FMCG from a relative performance perspective.