 "This year, we'll see a more broad-based rally: Pratik Gupta")
India is going to polls with an improved economic outlook, says Pratik Gupta, managing director and head of equities, Deutsche Equities India. He tells Samie Modak a favourable election outcome may lead to a substantial increase in foreign flows and an entrenched bull market for Indian equities. Edited excerpts:
Deutsche Bank has a target of 24,000 for the Sensex. Why do you think the markets will fare so well this year?
There will be event risks along the way, but overall, the markets will do well this year. You have to keep in mind the fundamental outlook is better, as we are seeing an improvement in the global economic environment and a bottoming out of the Indian economy. The key macro indicators are improving—the current account deficit has come off sharply, inflation has peaked, food prices are beginning to come off and the fiscal deficit should remain in check. Even on the corporate earnings front, we expect a better year ahead. The September quarter was the first in which we saw a pick-up in earnings. We expect the same in the December quarter. For the Sensex, we expect nine per cent earnings growth in 2013-14; we expect this will rebound to 15 per cent in 2014-15. Also, valuations aren't expensive, except in a few sectors such as consumer goods.
May be! You need a reasonably strong coalition government at the Centre. If that comes through, the bull run could become more entrenched. But either way, we have been through a couple of years in this growth downturn. Frankly, beyond the top 40-50 stocks, the rest of the market has been in the doldrums for the last few years. This year, the difference will be we will see a more broad-based rally, though the headline index may or may not go up as much.
Last year, the developed market outperformed the Indian one by more than 10 percentage points. Has India, or the emerging markets, decoupled with the rest of the world and will the developed world continue to outperform this year, too?
At current valuations, Deutsche still expects developed market equities to fare better than those in emerging market. But this year, the outperformance of developed market equities will likely be relatively less pronounced. Within emerging markets and Asia, India stands out as a relatively favoured market.
Have the concerns of foreign institutional investors (FIIs) about governance or macroeconomic conditions subsided?
The concerns have shifted from the macro side, as the current account deficit has come off sharply; on the fiscal deficit front, the expectation is the finance minister will deliver on his target of 4.8 per cent. The concern has now moved to government formation and the policy-making environment after the elections.
Last year, FIIs invested $20 billion in Indian equities. Will the strong flows from foreign investors continue this year?
FII flows should continue. The question is whether we will see a substantial increase in FII inflows or not. That, I think, will depend on the election outcome. But even if the FII inflows aren't at the same level as last year, the reduction in domestic selling should be a big positive, as we saw constant selling through last year.
Does the Aam Aadmi Party’s growing prominence increase the risk the next election will through a fractured mandate? Should the market discount this?
We don’t really have a view on which political party will form the government. The concern isn’t so much about who comes in or the combination; it is on whether we will get a strong, decisive government or not. Lately, there has been some renewed concern we will get a fractured mandate, but there are several months left and anything can happen in politics. In our view, it is still too risky to bet your portfolio based on an election outcome. Though elections are a big event from a domestic perspective, the environment in which we are going into the election is positive. If we get a positive outcome, you will see the market rallying even more.
Deutsche Bank has a target of 24,000 for the Sensex. Why do you think the markets will fare so well this year?
There will be event risks along the way, but overall, the markets will do well this year. You have to keep in mind the fundamental outlook is better, as we are seeing an improvement in the global economic environment and a bottoming out of the Indian economy. The key macro indicators are improving—the current account deficit has come off sharply, inflation has peaked, food prices are beginning to come off and the fiscal deficit should remain in check. Even on the corporate earnings front, we expect a better year ahead. The September quarter was the first in which we saw a pick-up in earnings. We expect the same in the December quarter. For the Sensex, we expect nine per cent earnings growth in 2013-14; we expect this will rebound to 15 per cent in 2014-15. Also, valuations aren't expensive, except in a few sectors such as consumer goods.
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You've said this year could see the start of a new bull market.
May be! You need a reasonably strong coalition government at the Centre. If that comes through, the bull run could become more entrenched. But either way, we have been through a couple of years in this growth downturn. Frankly, beyond the top 40-50 stocks, the rest of the market has been in the doldrums for the last few years. This year, the difference will be we will see a more broad-based rally, though the headline index may or may not go up as much.
Last year, the developed market outperformed the Indian one by more than 10 percentage points. Has India, or the emerging markets, decoupled with the rest of the world and will the developed world continue to outperform this year, too?
At current valuations, Deutsche still expects developed market equities to fare better than those in emerging market. But this year, the outperformance of developed market equities will likely be relatively less pronounced. Within emerging markets and Asia, India stands out as a relatively favoured market.
Have the concerns of foreign institutional investors (FIIs) about governance or macroeconomic conditions subsided?
The concerns have shifted from the macro side, as the current account deficit has come off sharply; on the fiscal deficit front, the expectation is the finance minister will deliver on his target of 4.8 per cent. The concern has now moved to government formation and the policy-making environment after the elections.
Last year, FIIs invested $20 billion in Indian equities. Will the strong flows from foreign investors continue this year?
FII flows should continue. The question is whether we will see a substantial increase in FII inflows or not. That, I think, will depend on the election outcome. But even if the FII inflows aren't at the same level as last year, the reduction in domestic selling should be a big positive, as we saw constant selling through last year.
Does the Aam Aadmi Party’s growing prominence increase the risk the next election will through a fractured mandate? Should the market discount this?
We don’t really have a view on which political party will form the government. The concern isn’t so much about who comes in or the combination; it is on whether we will get a strong, decisive government or not. Lately, there has been some renewed concern we will get a fractured mandate, but there are several months left and anything can happen in politics. In our view, it is still too risky to bet your portfolio based on an election outcome. Though elections are a big event from a domestic perspective, the environment in which we are going into the election is positive. If we get a positive outcome, you will see the market rallying even more.