Anand Shah, CIO, BNP Paribas Mutual Fund, believes the trend of margin compression and macro headwinds could result in further downgrades to consensus earnings estimates after the June quarter results. He lists out the worries for the markets and his investment strategy in an interview with Puneet Wadhwa. Edited excerpts:
The markets are finding it difficult to sustain at higher levels. How do you see them panning out in the near-to-medium term? What are the likely triggers for an upside or downside?
We believe that over the long term, India offers a superior investment opportunity. However, there are significant headwinds in the near term. Rising inflation, interest rates and oil prices pose serious threats to the Indian economy and its growth prospects. The slowdown in infrastructure and tightening monetary policy are expected to result in downgrades in the coming quarters and, hence, the markets are finding it difficult to sustain higher levels. While in the short term the markets may react to news and fund flows and trade in a narrow band, in the medium term they could trade with a negative bias due to slowdown in the economy and the sovereign debt crisis in Europe. However, a major correction in oil prices can have a positive impact.
Would foreign institutional investor (FII) inflows improve in the second half of FY12?
We believe FII flows in emerging markets in general, and Indian markets in particular, would be driven by various macro economic factors. When we look at prospects for FII flows over the long term, strong domestic consumption-driven growth story augurs well and will lead to significant positive cash flows into the country. However, over the short term, these are driven by factors like interest rates globally, quantitative easing, sovereign debt crisis and global growth. Thus, it may be difficult to predict foreign institutional flows into India in the second half.
Given the problems in the US and the euro zone, what will be the impact on Indian markets?
Problems in the US and euro zone mean slower global growth in the long term and, thus, lower commodity prices and oil prices eventually. This is good news for the Indian consumption story and, therefore, the Indian equity markets. However, in the short to medium term, the US and euro zone problems may lead to more quantitative easing and, thus, more liquidity and rising commodity prices.
While more liquidity may push up the markets, higher commodity prices are expected to drag down our equity markets leading to range-bound volatility.
What are your expectations from June quarter results? Which sectors, according to you, are likely to do well? Have the markets already discounted the same?
As the economic slowdown spreads to sectors beyond those linked to the investment cycle to domestic consumption cyclicals (like autos, white goods, real estate and media), we see deceleration in profit growth. Over the last two quarters, we have seen margin compression and consensus analyst estimates are going down. We expect further downgrades to consensus earnings estimates post the June quarter results. Among sectors, we expect consumer staples to show robust sales growth, though the margins might be slightly under pressure due to input cost inflation. We expect robust sequential volume growth in technology and telecom sectors, but margins again are expected to be under pressure. Banks will see margin compression as the deposit rate increase will wipe out the higher margins earned last year.