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It has been a good run for Indian equity markets since the past few sessions, given the arrest in the rupee's slide against the US dollar. Abhay Laijawala, managing director and head of research, Deutsche Equities India, tells Puneet Wadhwa in an interview that for India, currency stabilisation has emerged as the most critical parameter for the market and he does not expect disproportionate pain in Indian equities once the US Fed's quantitavie easing (QE) tapering begins. Edited excerpts:
It has been a painful two-month period for the global equity markets, especially India. Do you think this pain could aggravate over the next few months when the US Federal Reserve’s taper actually starts?
September is historically the worst month for stocks globally. In addition to a decision on Fed tapering, this month also sees the commencement of US budget negotiations ahead of the impending debt ceiling and possibly the nomination of the next Fed chair. These risks are likely to keep volatility elevated in the near-term, which investors must be cognizant of. Ultimately, we do not see a systemic threat emerging from these events and expect any 'September struggle' to be short-lived. The Fed's plan to taper asset purchases remains on track to begin this month subject to a continuation of robust data
The past few sessions have seen the Indian markets bounce back. Can we sustain here? In your opinion, what is the most critical factor for the Indian markets that will determine its direction?
For India, currency stabilisation has emerged as the most critical parameter for the market, and till the time volatility in the rupee is stemmed, we do not expect a sustained positive response from Indian equity markets. We think that Fed's QE taper is reasonably priced in and we do not expect disproportionate pain in Indian equities once tapering begins.
Do you see a case for our macroeconomic scenario improving?
For the past few months, financial markets have been spooked by a sharp depreciation in the rupee accompanied with heightened volatility. However, markets seem to be ignoring the self-restorative capacity of rupee depreciation, as it should now lead to higher export competitiveness for Indian goods and services.
Year-to-date (YTD), the Indian rupee has depreciated 17 per cent, making its performance the most significant in Asia and particularly versus India's other export competitors - Sri Lanka, Bangladesh, China, Pakistan and Vietnam - to which Indian exports have lost out over the past few years. The rupee is down 17 per cent YTD, while the Philippine peso, Pakistani rupee, Sri Lankan rupee and Vietnamese dong are down one-seven per cent even as the Chinese yuan and Bangladeshi taka have appreciated YTD.
We believe the sharp relative depreciation may allow Indian exporters - particularly in areas like textiles, leather and agriculture - to regain their competitive advantage. This, coupled with the ongoing global recovery, could mean that exports will, to a certain extent, assuage the concerns from the domestic macro situation. We expect India's export growth to rise sharply, after nearly 15 months of anemic export growth.
Crude prices have flared up mainly on account of the escalation of tensions in the Middle East (West Asia). Our commodities team expects Brent crude to average $107 a barrel in CY13, implying that crude prices have a fundamental downside bias from here, barring further tensions in the Middle East.
There is a school of thought that announcing or advancing the general election could see the markets bottoming out. Do you agree?
We believe the current government has over the past 12 months taken several progressive steps such as diesel price hikes, easing FDI (foreign direct investment) norms across sectors, reversing/postponing regressive tax provisions such retrospective taxation, passing the pension bill etc, which is sowing the seeds for restoration of medium-term growth and putting a hard floor below which GDP (gross domestic product) growth cannot fall.
We believe the stabilisation of the rupee, export growth assuaging CAD (current account deficit) concerns and any data flow indicating a sharp surge in monsoon led rural demand may be the biggest catalysts for suggesting a market bottoming than any announcement on elections.
Front-line banks, pharma, oil and gas and fast-moving consumer goods stocks have been beaten out of shape in the market carnage. Would you buy into some of those names now or do you think they would be available much cheaper in the next few months?
We believe valuations for Indian banks are now extremely attractive, even adjusting for a very bleak scenario, even as the macro environment remains uncertain (currency, higher rates and NPL risks).
Private Banks are well-positioned on capital and should be able to weather the current storm. Most private banks are now factoring in 3x our expected credit costs for the next three years. Even adjusting for five per cent lower growth, sharply lower margins and higher credit costs, we still find reasonable upsides.
We see consumer sector relative valuations, now at a two-decade high, as unsustainable considering the near-collapse in growth in most premium segments and slowing urban consumption. We currently prefer three key investment themes - global recovery plays, rupee depreciation beneficiaries and rural recovery plays.
What are your views on the information technology (IT) space?
IT services sector has been the biggest overweight in our model portfolio as we believe that the sector stands out in the current environment of improving global macro and weak rupee. We, however, do not think that IT is merely a rupee depreciation play, as we are witnessing significant fundamental improvement in business conditions particularly Europe and US, which constitute a significant portion of Indian IT industry revenues.
What's the view emerging now on FY14 and FY15 earnings estimates of India Inc? What do you think it could get scaled down to if the current situation persists?
We currently expect Sensex EPS (earnings per share) growth to come in at 10.5 per cent for FY14 and 14.4 per cent for FY15. We do not see a meaningful downside to consensus estimates as 40 per cent of Sensex earnings are linked to non-Indian revenue sources, which are likely to remain immune from the prevailing domestic macro stress and benefit from global recovery. In fact, Sensex stocks geared to a global recovery and rupee depreciation have recently seen earnings upgrades.
