 "Fed tapering will not impact Indian equities significantly: Manishi Raychaudhuri")
Manishi Raychaudhuri, managing director and Asia-Pacific strategist at BNP Paribas Securities, in an interview with Ujjval Jauhari, talks about the outlook for the markets after the state Assembly elections, as well as concerns related to the US Federal Reserve's plans to taper the bond-buying programme in that country. Edited excerpts:
What is your view on the rally after the Assembly election results?
The results of the state elections possibly ignited hopes of a pro-business government, leading to the recent rally. However, I would caution investors against reading too much into the results.
Companies that have strong managements and fundamentals, with de-leveraged balance sheets, are the ones investors should still look at. Otherwise, I recommend reducing exposure to these sectors (capital goods, infrastructure, PSU banks, etc) a bit.
Market participants are cautiously looking for indications on tapering by the US Fed. What will be the impact of this on equity markets?
We don't feel it will be as big a risk as it was in 2013 because first, constant reiteration of the risk has actually made the risk less potent than it was earlier. Second, current-account-deficit (CAD) countries, particularly India and Indonesia, have corrected the problems somewhat. Since CAD and trade deficit in India have declined somewhat, I don't think the problem or volatility will be as much as it was the last time.
What is your view on the rupee? In what range do you see it trading in the medium term?
I don't see the rupee appreciating to 53-54 levels or depreciating to 68-69. In the next six months, I expect it to trade at 61-64.
Do you see interest rates rising further in the coming days? What are your expectations from the next policy review?
It is likely the Reserve Bank of Indian (RBI) may increase the interest rates further during subsequent policy reviews. For the next review, we expect a rate rise of 25 basis points.
In the Asia-Pacific region, you prefer China-Hong Kong and Korea viz-a-viz India. How will foreign institutional investor (FII) flows into India fare?
I think FII inflows will be similar to the levels seen this year. FIIs tend to invest in India on the basis of stocks, not from a macro perspective. Typically, India gets 25-30 per cent of the FII flows into Asia and I don't see any major departure from that. As far as Fed tapering is concerned, it would be contingent on sustainability of economic growth. So, it might not be such a bad outcome for equities.
What trajectory will the broader markets follow in the days to come?
We will have nine-10 per cent earnings growth through the next couple of years and the markets will move in line with that earnings growth. But since at current levels, the markets have factored in too much, they need to correct slightly before moving in line with that earnings growth.
What is the rationale behind moving away from PSU banks? What do you think of the banking space as a whole?
We are cautious on PSU banks, as their asset quality problems aren't over yet. However, comparatively, we would still continue our positive stance on strong private sector banks that have a good deposit franchise.
Among various sectors, where does value lie?
The investment cycle in India has to improve. Corporate India has to again be confident on investments. Currently, the economy is predominantly being driven by rural consumption, some government spending and export recovery.
Till the investment cycle does not return, we see value only in rural consumption and export-orientated stories, for instance, tractor manufacturers or four-wheeler manufacturers such as Mahindra and Mahindra, which might see some extra impetus from pre-election spending, too.
Also, companies that have strong global exposure and earn significant revenues from international markets should be the focus. Pharmaceutical companies, information technology (IT) companies and auto companies with an export focus and foreign currency earnings can be looked at.
IT sector stocks have seen a strong run-up. Do you see more steam there?
IT stocks have run up and factor in the benefits of currency depreciation. However, growth momentum in developed countries is picking up and the additional demand arising from such recovery is yet to be discounted in share prices. There are stocks in the sector that will continue to do well.
What is your view on the rally after the Assembly election results?
The results of the state elections possibly ignited hopes of a pro-business government, leading to the recent rally. However, I would caution investors against reading too much into the results.
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In a report a few weeks ago, we had mentioned the state Assembly election results didn't necessarily translate into a similar outcome during the general elections. So, for sectors that have rallied on the back of this such as public sector undertaking (PSU) banks, industrial and engineering, etc, people have to be very selective.
Companies that have strong managements and fundamentals, with de-leveraged balance sheets, are the ones investors should still look at. Otherwise, I recommend reducing exposure to these sectors (capital goods, infrastructure, PSU banks, etc) a bit.
Market participants are cautiously looking for indications on tapering by the US Fed. What will be the impact of this on equity markets?
We don't feel it will be as big a risk as it was in 2013 because first, constant reiteration of the risk has actually made the risk less potent than it was earlier. Second, current-account-deficit (CAD) countries, particularly India and Indonesia, have corrected the problems somewhat. Since CAD and trade deficit in India have declined somewhat, I don't think the problem or volatility will be as much as it was the last time.
What is your view on the rupee? In what range do you see it trading in the medium term?
I don't see the rupee appreciating to 53-54 levels or depreciating to 68-69. In the next six months, I expect it to trade at 61-64.
Do you see interest rates rising further in the coming days? What are your expectations from the next policy review?
It is likely the Reserve Bank of Indian (RBI) may increase the interest rates further during subsequent policy reviews. For the next review, we expect a rate rise of 25 basis points.
In the Asia-Pacific region, you prefer China-Hong Kong and Korea viz-a-viz India. How will foreign institutional investor (FII) flows into India fare?
I think FII inflows will be similar to the levels seen this year. FIIs tend to invest in India on the basis of stocks, not from a macro perspective. Typically, India gets 25-30 per cent of the FII flows into Asia and I don't see any major departure from that. As far as Fed tapering is concerned, it would be contingent on sustainability of economic growth. So, it might not be such a bad outcome for equities.
What trajectory will the broader markets follow in the days to come?
We will have nine-10 per cent earnings growth through the next couple of years and the markets will move in line with that earnings growth. But since at current levels, the markets have factored in too much, they need to correct slightly before moving in line with that earnings growth.
What is the rationale behind moving away from PSU banks? What do you think of the banking space as a whole?
We are cautious on PSU banks, as their asset quality problems aren't over yet. However, comparatively, we would still continue our positive stance on strong private sector banks that have a good deposit franchise.
Among various sectors, where does value lie?
The investment cycle in India has to improve. Corporate India has to again be confident on investments. Currently, the economy is predominantly being driven by rural consumption, some government spending and export recovery.
Till the investment cycle does not return, we see value only in rural consumption and export-orientated stories, for instance, tractor manufacturers or four-wheeler manufacturers such as Mahindra and Mahindra, which might see some extra impetus from pre-election spending, too.
Also, companies that have strong global exposure and earn significant revenues from international markets should be the focus. Pharmaceutical companies, information technology (IT) companies and auto companies with an export focus and foreign currency earnings can be looked at.
IT sector stocks have seen a strong run-up. Do you see more steam there?
IT stocks have run up and factor in the benefits of currency depreciation. However, growth momentum in developed countries is picking up and the additional demand arising from such recovery is yet to be discounted in share prices. There are stocks in the sector that will continue to do well.