Markets are down in recent weeks on some profit-booking and following RBI’s move of raising interest rates in its bid to curb inflation. Pankaj Pandey, head (Retail Equity Research), ICICI Securities, spoke to Puneet Wadhwa on various issues facing the markets. Edited excerpts:
Do you expect further downside for the markets from these levels?
The Nifty lost considerable ground last week, after the RBI’s aggressive rate hike. This, we believe, coupled with other macro headwinds and political issues, will lead to a moderation in GDP growth rate and earnings downgrade for 2011-12.
Hence, the ongoing correction is an adjustment for these concerns. Our worst case scenario for the Sensex would be 16,900 (14xFY12E EPS of Rs 1,209). One is expecting that a pinch of negative new flow from other economies or locally can lead to a high degree of volatility in the Indian markets.
Do you think the Indian market is fairly valued?
From a valuation perspective, the macro backdrop valuations (15.3xFY12E EPS at Sensex levels of 18,400) are still in a fair value zone and have not become highly attractive, given that the next few quarters in terms of earnings will be soft.
Is RBI done with rate hikes for the near-to-medium term? If not, what is the amount you expect in this financial year?
The last policy meet has clearly indicated that the stance of RBI has changed from balancing growth and inflation to combating inflation at the cost of growth moderation. Though it sounded aggressive on inflation, it is important to monitor the movement of commodities, especially crude (oil), which, in turn, will be a key indicator for the central bank’s action.
Our sense is that FY12 will witness hikes to the extent of 100 basis points (if commodities, especially crude, stay at elevated levels), of which 50 bps has already come through.
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What is your outlook for the interest rate-sensitive sectors? Should one start bottom-fishing in this space or do you recommend staying away for now?
Of the three interest rate-sensitive sectors, viz automobiles, banks and real estate/infrastructure, we are bullish on autos and banks from a structural point of view. Though the recent rate hikes will be a dampener for demand to accelerate in these sectors, we would be neutral from a short-term perspective. However, a 10-15 per cent correction from these levels will turn us buyers in these sectors from a two-year perspective.
How have you churned your portfolio in recent months? Which sectors were included and which ones went out of flavour? What is the strategy in the quarters to come?
In the wake of recent negative news flows, macro headwinds and rich valuations, we had raised our cash levels from, say, five per cent of the total portfolio to 15 per cent of the total, and turned cautious on the markets over the past few months.
From a portfolio perspective, we continue to be overweight on information technology (preferably large-caps), autos, pharma, banks (preferably large-caps), consumer goods, oil & gas and selective mid-caps and remain neutral/negative on capital goods, infra, power and real estate.
We will still maintain our cash levels where they are and turn into aggressive buyers if the markets correct by another 10-15 per cent and run down our cash levels at that point of time.
What is your outlook for the commodity space, especially gold and silver?
Though we do not actively track bullion, one should be cautious in the near term, given the huge run-up these commodities have witnessed. There may be huge bouts of volatility in these commodities.
However, from a structural point of view, till the time the issues of western economies do not get solved and excessive liquidity in the system injected by central banks remains, these commodities will be in flavour. The best way to play these and the attached volatility is via the Systematic Investment Plan (SIP) route.