 "Investing in Indian equities is a contrarian bet at this juncture: Motilal Oswal")
As the markets come to terms with the possibility of winding down of the US Federal Reserve’s bond buying programme and the key economic data from China, the Indian government took a bold decision to re-cast the gas prices that sent the Indian markets soaring despite the rupee-dollar equation. Motilal Oswal, CMD, Motilal Oswal Financial Services tells Puneet Wadhwa in an interview that the room for interest rate cut still remains limited due to lack of major reforms in India and turbulent external environment. Excerpts:
Have the latest economic and market related developments made you bearish or are you hopeful that this could just be a panic reaction and things are not as bad as they have been made out to be?
There is no denying the fact that fundamentals of Indian economy have deteriorated significantly over the last 12 months. The Indian economy is inherently cyclical and the current downturn has been manifested by lack of investment growth along with lower consumer spending due to abnormal inflationary environment.
Latest developments on QE have brought “risk aversion” back into the game. P/E multiple at less-than 10-year average remains silver lining for Indian equity thus making sense for investors to take advantage of low valuations.
What are the implications of this on emerging markets (EMs), especially India, which is also grappling with a widening current account deficit amid sliding rupee? Where does it leave the Reserve Bank of India (RBI) in terms of rate cuts?
The latest commentary by the US Federal Reserve (US Fed) on gradual withdrawal of quantitative easing (QE) has shaken global financial markets, as accommodative monetary policy will no more act as a fuel for global growth. It seems that QE has outlived its purpose.
Rise of US economy always results in concentration of capital flows towards US and away from emerging markets, thus chasing higher interest rates as well as appreciating US currency. These developments have temporarily made EM’s less attractive from FII’s perspective. Attracting capital flows will be a challenge for some time.
The RBI may take clues from steep fall in inflation over last couple of weeks and cut rates. However, the room for such cuts remains limited due to turbulent external environment along with lack of major reforms in India.
Do you think that foreign institutional investors’ (FIIs) fascination with India in the emerging market pack may be getting over given the worsening macros?
Stock markets are slave of earnings. Over the last decade, Indian corporate profits have more than quadrupled which along with reasonable valuations has acted as major attraction for the FIIs. For the comparable period – even Chinese corporate profits have witnessed similar growth.
However, due to valuation concerns in the past and possibility of bursting of credit bubble would act as a deterrent for investors. Amongst pack of EM’s – the Indian market would continue to remain a darling due to favourable demographic profile coupled with visibility in corporate earnings growth/high ROE that, too, at reasonable valuations.
Do you think that the recent developments have clouded the focus government’s reform agenda and the concerns regarding the evolving political scenario?
The recent developments have no doubt shifted governments focus from reforms / growth towards containing the current account deficit and somehow protecting the INR. Fed’s statement spooked all the major global stock markets and India was no exception to it.
In fact, recent correction in Indian stock markets and INR was more or less in line with other emerging equity and currency markets. Once the depression due to QE withdrawal subsides, the focus will again shift to domestic factors in India.
In two out of past three occasions, the Bombay Stock Exchange (BSE) Sensex has recorded a gain of over 50% during twelve-month period before the Lok Sabha elections, data suggests. Will this time be different? Why / why not?
Over the past three occasions, elections were contested between two national parties – UPA (United Progressive Alliance) and NDA (National Democratic Alliance). However, we have observed that during the last two – three years, regional parties have emerged stronger and are determined to participate in national politics. It is too early to guess the market behaviour at this time.
Metals, banks and realty counters bore the brunt of the recent selling? What’s your take on these sectors? Are there any specific stocks that look attractive from a one-year perspective? What about the mid-caps?
Over the last six months, global metal prices have witnessed steep fall with CRB (Commodity Research Bureau) metal index down by 13% over the same period. Resultantly, even BSE Metal Index has collapsed by 32% YTD from January 01. 2013.
Last financial year was disastrous in terms of earnings growth for Real Estate sector with MOSL sector EPS down by 24% and ROE sub-5% mark. Weakness may persist in this sector till visibility in earnings improves.
As far as the banking sector is concerned, we believe private sector banks would continue to lead the banking sector pack. From medium-term perspective, our top picks are ICICI Bank, Maruti Suzuki, Tata Motors, ONGC, Infosys and Divi’s Lab. In the mid-cap space, we like Supreme Industries, Eclerx Services and Bajaj Finance.
Are there any contrarian bets that you would like to take in terms of specific stocks / sectors at this stage?
Investing in Indian equity market itself is a contrarian bet at this juncture. Among stocks, public sector (PSU) counters could be one such bet.
What do you advise investors do with the oil & gas stocks now in the light of the recent decision of gas pricing?
Gas pricing is a complex issue as it is dependent on geographic location of the gas, production/ exploration costs and comparable international prices. Accordingly the government has taken a long drawn consultative approach to determine prices, which is deemed to be just and fair.
Though the decision is positive and is a step in the right direction for the economic reform process, one will have to be very selective in this space while investing. ONGC and Reliance Industries are clear beneficiaries of this decision.
Have the latest economic and market related developments made you bearish or are you hopeful that this could just be a panic reaction and things are not as bad as they have been made out to be?
There is no denying the fact that fundamentals of Indian economy have deteriorated significantly over the last 12 months. The Indian economy is inherently cyclical and the current downturn has been manifested by lack of investment growth along with lower consumer spending due to abnormal inflationary environment.
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Reserve Bank of India’s (RBI’s) strategy of inflation targeting by keeping liquidity in deficit mode seems to be playing out well as WPI (wholesale price index) inflation has already receded and is now within comfort zone. Policy changes pertaining to FDI and clearing of investment lock jam can hopefully improve the current environment.
Latest developments on QE have brought “risk aversion” back into the game. P/E multiple at less-than 10-year average remains silver lining for Indian equity thus making sense for investors to take advantage of low valuations.
What are the implications of this on emerging markets (EMs), especially India, which is also grappling with a widening current account deficit amid sliding rupee? Where does it leave the Reserve Bank of India (RBI) in terms of rate cuts?
The latest commentary by the US Federal Reserve (US Fed) on gradual withdrawal of quantitative easing (QE) has shaken global financial markets, as accommodative monetary policy will no more act as a fuel for global growth. It seems that QE has outlived its purpose.
Rise of US economy always results in concentration of capital flows towards US and away from emerging markets, thus chasing higher interest rates as well as appreciating US currency. These developments have temporarily made EM’s less attractive from FII’s perspective. Attracting capital flows will be a challenge for some time.
The RBI may take clues from steep fall in inflation over last couple of weeks and cut rates. However, the room for such cuts remains limited due to turbulent external environment along with lack of major reforms in India.
Do you think that foreign institutional investors’ (FIIs) fascination with India in the emerging market pack may be getting over given the worsening macros?
Stock markets are slave of earnings. Over the last decade, Indian corporate profits have more than quadrupled which along with reasonable valuations has acted as major attraction for the FIIs. For the comparable period – even Chinese corporate profits have witnessed similar growth.
However, due to valuation concerns in the past and possibility of bursting of credit bubble would act as a deterrent for investors. Amongst pack of EM’s – the Indian market would continue to remain a darling due to favourable demographic profile coupled with visibility in corporate earnings growth/high ROE that, too, at reasonable valuations.
Do you think that the recent developments have clouded the focus government’s reform agenda and the concerns regarding the evolving political scenario?
The recent developments have no doubt shifted governments focus from reforms / growth towards containing the current account deficit and somehow protecting the INR. Fed’s statement spooked all the major global stock markets and India was no exception to it.
In fact, recent correction in Indian stock markets and INR was more or less in line with other emerging equity and currency markets. Once the depression due to QE withdrawal subsides, the focus will again shift to domestic factors in India.
In two out of past three occasions, the Bombay Stock Exchange (BSE) Sensex has recorded a gain of over 50% during twelve-month period before the Lok Sabha elections, data suggests. Will this time be different? Why / why not?
Over the past three occasions, elections were contested between two national parties – UPA (United Progressive Alliance) and NDA (National Democratic Alliance). However, we have observed that during the last two – three years, regional parties have emerged stronger and are determined to participate in national politics. It is too early to guess the market behaviour at this time.
Metals, banks and realty counters bore the brunt of the recent selling? What’s your take on these sectors? Are there any specific stocks that look attractive from a one-year perspective? What about the mid-caps?
Over the last six months, global metal prices have witnessed steep fall with CRB (Commodity Research Bureau) metal index down by 13% over the same period. Resultantly, even BSE Metal Index has collapsed by 32% YTD from January 01. 2013.
Last financial year was disastrous in terms of earnings growth for Real Estate sector with MOSL sector EPS down by 24% and ROE sub-5% mark. Weakness may persist in this sector till visibility in earnings improves.
As far as the banking sector is concerned, we believe private sector banks would continue to lead the banking sector pack. From medium-term perspective, our top picks are ICICI Bank, Maruti Suzuki, Tata Motors, ONGC, Infosys and Divi’s Lab. In the mid-cap space, we like Supreme Industries, Eclerx Services and Bajaj Finance.
Are there any contrarian bets that you would like to take in terms of specific stocks / sectors at this stage?
Investing in Indian equity market itself is a contrarian bet at this juncture. Among stocks, public sector (PSU) counters could be one such bet.
What do you advise investors do with the oil & gas stocks now in the light of the recent decision of gas pricing?
Gas pricing is a complex issue as it is dependent on geographic location of the gas, production/ exploration costs and comparable international prices. Accordingly the government has taken a long drawn consultative approach to determine prices, which is deemed to be just and fair.
Though the decision is positive and is a step in the right direction for the economic reform process, one will have to be very selective in this space while investing. ONGC and Reliance Industries are clear beneficiaries of this decision.