Even as global investors tend to stick to safer havens like gold and dollar, the risk-reward ratio to invest in equities is high for market participants, Dhiraj Sachdev, vice-president & senior fund manager, HSBC Asset Management (India), tells Jinsy Mathew. Edited excerpts:
How do you see Indian markets panning out in the coming days?
The Indian stock market is currently largely correlated to global markets. Sentiments are weak and there is a lack of interest among Indian retail or institutional investors. So, besides local speculators, foreign institutional investors (FIIs) are dictating the market movement in the near term.
However, fundamentally, the three macro variables hurting the markets in the last three-four quarters have been high interest rates, inflation and commodity prices. To an extent, these are showing signs of reversal.
As such, the risk-reward ratio to invest is high for market participants. The only caveat is currency weakness and stubbornly firm oil prices that could negate any reduction in imported inflation. Over the last decade, the Indian market has witnessed several crises, appearing every two to three years, which have proved to be opportunities in disguise. And, this one may be no different.
What do you make of the developments across the euro zone?
Euro zone troubles can’t be solved all together by printing money. And, despite interim relief, problems on the credit or demand side will remain.
However, the recapitalisation of European banks and any political consensus for austerity measures will reduce uncertainty, which markets will take positively. The zone will face lean periods of growth, given changes in bank credit or tax norms.
FIIs continue to remain sellers even after the positive hint from the Reserve Bank of India (RBI) regarding interest rates. Why is it that they are choosing to be fence-sitters?
India has seen a modest inflow year-to-date (YTD), rather than net sale from FIIs. For FIIs, an emerging market is considered to be an asset class. When fear is ruling across financial markets, global investors tend to stick to safer havens like gold or dollar.
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Given that the rupee has fallen by 10-12 per cent in the recent past, FIIs have taken a hit on their MTM (mark to market values). In the near term, they are watching currency closely besides government initiatives to proceed with long awaited reforms, before making large fresh commitments.
Over a longer term, however, we do believe that flow of money will continue into emerging markets like India from uncertain and low-growth developed markets.
We had a slew of downgrades so far. Do you think after the current quarter there will be a tapering on downgrades?
I think most of the downgrades are already priced in or discounted by the market. However, the situation won’t improve much in the next two quarters as it might take some time for the drop in the commodity prices to reflect in the operating margins of corporate sector, given the depreciating rupee. Also, interest rates, while being paused, may take some time to start reducing.
Till such time, leveraged companies or capital intensive businesses are expected to continue to incur high financial costs.
What is your take on the banking space, as there has been some confusion with the Moody’s and S&P’s ratings?
We remain positive on the Indian banking space, given that India is a capital-starved economy and banking is a growth business. Public sector (PSU) banks are now available at close to 1x adjusted book value, with some of them having good ROEs (return on equity) of nearly 15-20%. So, it makes sense to participate in the banking space now, as valuations are attractive and we cannot expect the current situation to continue.
Which sectors would you prefer in the current market conditions?
We are incrementally positive on autos, and specifically two-wheelers. Besides this, we remain positive on commercial vehicles and banks, as interest rates are peaking.
In the banking space, private sector banks are preferred but there are select public sector companies with good asset quality and high RoEs that we like.
Technology is another space where we have not seen any let down on outsourcing and currency is also playing in its favour. Consumer discretionary and agri crop protection businesses are other spaces that we like.