 "For India, valuations are not stretched now: Dixit Joshi")
How is the environment like for equities?
Go back a year, you had major uncertainties around GAAR, Greece, Eurozone, a real debate about hard landing or soft landing in China. There were issues across all continents and specifically in India as well. Think about what has happened subsequently, the tail-risk has been removed from the globe. Central banks have been pursuing accommodative policies and have reassured that there won’t be major market dislocation thereby laying the framework for global growth.
We expect a global growth of 3.2% for this year which is very constructive for equity markets. China, we don't have the hard landing or soft landing debate anymore and expect a growth to be in the region of 8-9%. We have seen a leadership change which has gone smoothly, with the policy and reform agenda continuing.
Then you had a slight reversal from the flows that moved out of equities to bonds over the last five years. The bond markets have had very strong performance the last couple of years. But what you have seen the last quarter of last year, the performance come back to equities as some of these funds are actually coming back into the equity market. When you put all this together it makes for a much better environment for equities.
What’s your take on the budget?
The budget has been responsible and has not resorted to populist measures in spite of the general elections next year. That's a positive sign. We need to see pragmatism continued throughout the rest of the year. There needs to be discipline around the fiscal deficit.
The gold price pull back helps and inflation having come off also allows the Reserve Bank of India to be a little more accommodative on the rate front.
Some incentives announced in the budget for capex and investments were good and if that comes along, it will increase the confidence levels of locals, which hasn’t been there in the last six-eight months. If we get that confidence back that will attract a lot more FDI flows.
Where do you think the Indian market will go from here?
What's clear is that New Delhi needs to continue the momentum. The thoughts in the minds of many foreign investors is whether we will see delivery. That's probably the most important area to watch. Policy action needs to be followed by delivery, we need to see execution of strategy and a road map articulated for the next few years.
What has triggered the current risk off sentiment?
We have seen some risk off in the last couple of weeks. I think its on account of US sequestration and an unclear election results in Italy. India, specifically, had a great performance last year.
It is only natural that we take a breather. But what's illustrative on the FII side, is that they have been buying in a declining market. This is often a test of investor sentiment. So I think from FII perspective, these are asset allocation decisions that are part of broader shift into equities and into emerging markets.
When could we see an improvement in sentiment?
It is very dependent on the global factors, which are driving investments into equities. India needs to deliver on the reform agenda. We are constructive on US, which will drive export growth. We are sanguine about growth in China. One concern would be the euro zone, where we have seen growth deteriorate. So that's one variable that we need to keep a close eye on.
But fortunately, the US and China and rest of Asia continue to power along. If global growth stays robust and we don't have a dislocation event elsewhere, then I think the stage is being set for quite a strong environment for equities. We are bullish on equities globally.
How does India look like on the valuation basis?
We have had a poor earnings season. But that said we are expecting earnings growth of 15% over the next two years. When you look at India trading at 13-14 times 2013 forecast earnings, that's about a 15% discount to the five-year average. So valuations are not stretched but for the market to move higher from here, it is important that we continue to see action out of New Delhi.
How does India look like on a relative basis?
South East Asia continues to perform better than India. There are very compelling investment opportunities in Indonesia, Malaysia and Thailand. The growth that we are seeing in many of those places has been dramatic. India needs to compete within that investment landscape.
Will India continue to get more than its fair share of foreign flows?
India is off to a great start this year. Out of the $13 billion that has found its way into Asia, $8 billion has come into India. Most definitely India is holding its own and disproportionate amount of cash is being flown into India. But let's us not forget, we also didn't have great flows in the last two years and some of that is reversal of that trend.
What are the sectors or themes that you prefer?
Sectors sensitive to global growth will be an important theme. Globally, we are seeing good GDP growth, benign rate environment and corporates who are under leveraged. All of that plays out for robust growth environment. Over and above, sectors that are sensitive to rate policy in India.
We are expecting 75 basis points of rate cut this year; we have had 25 bps already. Thirdly, sectors that are sensitive to policy reforms such as infrastructure. So broadly, the sectors I would focus on would be IT, infrastructure, oil and gas and banks.