After the run-up since the beginning of this year, global markets are now taking a breather and consolidating. G Ananth Narayan, head of global markets, South Asia, Standard Chartered Bank, tells Puneet Wadhwa equity markets have room for an upside. For India, if the core issues on infrastructure investments and projects are addressed, equity markets could be re-rated, he says. Edited excerpts:
The Euro zone is still in trouble. The US and China have their own set of problems. Do the macro parameters and the policy framework show the global economy and markets would improve in 2013?
The US private sector gives confidence and credence to the current global risk-on sentiment. The fundamentals there are strong, despite the obvious political and fiscal risks. With low property prices, improving labour markets, the emerging North American energy and shale gas story and the large amounts of investible cash available with US companies, conditions are ripe for a resurgence of growth and private investment in the US.
While not as compelling as the US, data coming from China and Europe paint a healthier picture, compared to the bearish views espoused earlier. Despite risks around politics and events, in 2013, global growth should outpace that seen in 2012. In summation, I believe there is cause for quiet confidence, far more than any time in the last five years.
Is ‘risk-on’ trade firmly back in the markets? As of now, what is your equity and debt market strategy?
Given the fundamentals of the US private sector, global risk-on appears to have legs, albeit with risk factors to watch out for. The six-year low reading on the VIX index illustrates this ‘risk-on’ sentiment of the markets. And, contrary to fears, quantitative easing by various central banks has not yet led to commodity and inflation bubble. Globally, risk-on should mean better export performance from India and money flowing into risk markets.
In the short run, that provides a base for Indian equities. If the energy supply story does unfold as predicted, it could be a medium-term positive for countries such as India. Alongside, if the core issues on India infrastructure investments and projects can be addressed and, therefore, if the strength of the India growth story can be reiterated, this could mean a sustained re-rating of the Indian equity markets. This continues to be within the reach of policy action.
On debt, the promised improvement in the fiscal deficit and the WPI (Wholesale price Index) trajectory are very positive. In the short-to-medium run, there appears to be legs to the current bond rally—-maybe to 7.50 per cent on the 10-year bond.
In the Indian context, do you think the worst is behind us in the corporate earnings front?
Earnings downgrades stopped in October 2012. Since then, they have only been inching up very gradually. We believe a material earnings upgrade cycle is about six months away, as consumption still appears to be slowing and an impact of any capex recovery can be a bit back-ended.
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In the Indian context, my bullishness is tempered by the high levels of corporate leverage and stressed banking assets. In the short run, I think export sectors such as information technology (IT) and pharmaceuticals can surprise on the upside.
In the longer run, a lot is predicated on the revival of domestic infrastructure investments and projects—-decisive policy action can spur positive surprises there, particularly in telecom and select energy stocks. On the flip side, if the morass continues, leveraged sections of corporate India can throw up negative surprises.
What do you expect from the Reserve Bank of India (RBI) in 2013?
RBI is probably caught in a bind of slow growth and paralysis in infrastructure projects, juxtaposed with high levels of CPI (Consumer Price Index), high current account and fiscal deficits and India’s foreign currency debt far exceeding its reserves.
What is likely is perhaps another 50-75 basis point (bps) cut this calendar year. Given the trajectory of the WPI (which could end at 6.80 per cent in March 2013, as opposed to RBI’s projected 7.50 per cent), assurances from the finance minister on the fiscal front and the slowdown in consumption and growth, this can be justified.
What are your views on the infrastructure, telecom and capital goods spaces? Do you think stocks here can deliver better returns compared to the usual defensive bets like pharmaceuticals and fast-moving consumer goods (FMCG)?
Slowing infrastructure investment continues to be an impediment to the long-term India growth story. Long-tenor funding is not easy to come by and existing projects are caught waiting for policy solutions and clearances, leading to delays and escalation in costs. In the short-to-medium term, besides policy clearances, I believe we need to ensure directed liquidity to infrastructure investments via steps such as allowing refinance of infrastructure projects.
We believe the market would take a breather, in terms of the fascination for the consumption theme. While the household leverage still remains low and supportive of long-term consumption growth, FY14 could be a transition year, in which a slowdown sets in temporarily. This is the reason for us to be ‘overweight’ on IT services and pharmaceuticals, where export lead earnings growth could beat the FMCG space.
Besides, there would always be appetite in the market for sectors seeing structural shift in outlook, such as telecom, where the industry seems to have realised tariff rises are a must for survival. The outlook is much tougher (and dependent on policy action) for the infrastructure sector and capital goods.
Do you think it is a good time to invest in rate-sensitive stocks, especially automobile and banking?
Rate cuts may not trigger higher credit growth immediately for automobile stocks, which fall under consumer discretionary. Unless we are surprised by more rate cuts, we think much of the rate cuts are priced in already. In the banking space, the market will likely watch the asset quality very closely and continue to prefer banks that show fewer signs of stress.