Atul Singh, managing director & head (wealth management) at Merrill Lynch Wealth Management, India, tells Puneet Wadhwa the worst is over on the industrial slowdown. Edited excerpts:
It has been a topsy-turvy FY12 for global equity markets. Given the macroeconomic headwinds, how do you see FY13?
Global growth stood at 3.8 per cent in CY2011 and is forecast to decline to 3.6 per cent in 2012, with the euro zone expected to slip into a mild recession. Developed economies remain vulnerable, with crippled sectors, and regions and central banks are expected to provide additional support in the year ahead.
A further upside in the global equity markets would depend on whether stronger economic growth can be translated into higher earnings. Markets remain focused on slowing Chinese and European growth. As a result, we expect the US to deliver relatively better performance but await greater earnings clarity before adding new positions.
What is your assessment of the Indian economy? Is the worst behind us?
Growth has slowed in India. The January 2012 Index of Industrial Production, at 6.8 per cent, was significantly higher than forecasts. However, we continue advising clients to look beyond the volatility in the monthly industrial data due to data bunching issues. Taking a longer view, we believe the worst is over on the industrial slowdown. At the same time, we do not see a turnaround till lending rates come off in mid-2012 and feel inflation is peaking.
Given this backdrop, do you expect the markets to move north?
The market may cool. While the recent liquidity-easing measures by central bankers have boosted sentiment and flows towards emerging markets, the elevated levels of economic and geopolitical uncertainty continue. The deteriorating macro data in India — soft core sector growth, sticky inflation, slowing credit growth, high yields and worsening fiscal outlook, especially on persistently high energy prices — should cap the upside in equities.
March has seen a lot of news flow at the domestic level. Do you think inflows could now take a breather as foreign institutional investors digest these developments and realign their investment strategies?
While the existing confusion may lead to uncertainty, impacting flows on an immediate basis, on a longer term basis, India continues to be a global growth haven and, thus, should continue to attract its fair share of foreign inflows.
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China has been buying bonds from the cash-strapped euro zone nations, despite having problems of its own in terms of a slowing economy. Can you see another crisis in the making?
The Chinese manufacturing and export base is slowing materially from the fourth quarter 2011 pace, reports suggest. A recent lowering of the annual GDP target to 7.5 per cent by government officials, initially viewed sceptically as political theatre, appeared validated by the weak steel output figures, declining exports and a read on new orders that was the lowest in four months. While we agree investors need to pay attention to these trends, given China’s size and contribution to global growth, our view remains of a soft landing and real GDP growth of roughly eight per cent.
However, what makes the China data hard to interpret and raises the spectre of ‘hard landing’ scenarios is that Chinese policymakers are navigating a tenuous balance between deflating a clear bubble in housing/construction/real estate and stimulating more diversified sources of growth in the services and consumer-centric sectors. And, they are executing the rebalancing of credit through a centralised banking system that continues to exhibit strains.
What is your strategy, given the current economic scenario? What are you advising your clients?
We continue to suggest a moderate asset allocation—a predominantly large-cap defensive equity portfolio, some tactical high-yielding debt and adequate cash. Use the recent sharp rally from the December lows to re-orient portfolios towards high quality large-cap stocks and raise adequate tactical cash.
Which sectors are you bullish and bearish on for FY13?
We are overweight on pharma, automobiles, private banks and consumers (selectively) and underweight on metals, energy, engineering and construction and public sector banks (selectively). We remain neutral on telecom, capital goods (selectively) and information technology.
What are your expectations from India Inc’s fourth quarter earnings season?
For the full FY12, earnings are likely to have grown 12 per cent over FY11.
How do you see the rupee panning out in the near to medium term?
Both short-term and structural risks are rising for the rupee. While we think the Reserve Bank of India (RBI) would intervene to prevent any sharp depreciation, the firepower of RBI is reducing structurally. Historically, rupee depreciation has been negative for the markets.