Markets have been keenly watching statements from the central banks across the globe in the hope of a fresh round of stimulus. Avinash Gupta, managing director, head, global market sales, Bank of America-Merrill Lynch tells Puneet Wadhwa though valuations are slightly below the long-term averages, they are not cheap. Edited excerpts:
Most European policymakers will be back in action soon after the summer holidays. We also had the Jackson Hole meeting. China, too, has been releasing key macro data. What is your expectation of how things may unfold for the global economy over the next few months?
We see the global economy muddling. Global growth should slow to 3.1 per cent in 2012 and 2013 from 3.8 per cent in 2011. Growth in the US will likely come off to 1.4 per cent in 2013 from 2.1 per cent in 2012. China will also slow to 7.5 per cent levels. On our part, we see central banks easing in support of growth. Our US economists’ expect a third round of quantitative easing (QE3) by December.
Indian markets have been among the best performers in calendar year 2012 and have attracted significant flows from overseas investors. Do you see these trends continuing for the remaining part of the financial year?
We think India has benefited from relative value. While things are bad here, they are not much better elsewhere. We have also benefited from risk diversification out of China. At the same time, monetary easing and some reform measures are needed to sustain FII (foreign institutional investor) inflows. Our December Sensex target is 19,000.
The European Central Bank (ECB) has rejected claims it may resort to buying Euro-zone countries' bonds if their borrowing costs breached certain levels. Do you think this could become a reality going ahead, and should bond market players, including in India, be worried?
The ECB has put a basic framework in place to do so. We have to see how the precise details pan out. As far as India is concerned, a weaker euro, arising out of further ECB easing, could put further cross-currency pressure on the rupee in terms of the dollar. Given that FII debt limits are limited, we do not see much impact on bond flows.
Most high-risk assets globally, including India, have moved up on hopes of stimulus from various central banks that could inject more liquidity into the system. Do you think the upmove has been premature? Are the current valuations ignoring weak fundamentals?
Liquidity has been ahead of itself for sure and India has been a key beneficiary of the same. YTD (year-to-date) inflows of approximately $10 billion are real monies coming in to buy real equity. Though valuations at around 14x one–year forward earnings are slightly below long-term averages, they are not cheap.
Given the weaker growth trajectory, both in terms of earnings and GDP, we believe the markets have a higher chance of de-rating than re-rating from here on. That said, real reforms in India and easing of global woes may continue to drive these markets higher.
So, what’s the call that foreign investors are taking on India? What is your investment strategy for the next 6 – 12 months? Would you be a buyer in defensives or is it time to shift focus to high beta names? Can you name a few sectors/stocks that are on your buying and selling list?
A lot of the money that we have seen coming in this year have been from macro funds. The real bottom-up investor is not yet positioned to play this rally. So, if the government plays its cards right, we can see a rally which will be both sharp and hard in nature. We will have these same investors chasing stocks. We currently have a barbell strategy through pharma, which also gains from the rupee, and through a defensive private sector bank, whilst also being overweight on the rate sensitive sectors like autos and banks. However, we are wary of the expensive consumer stocks.
When do you see the earnings cycle picking up and have you revised the estimates for FY13 and FY14 earnings? Are we in for a few more quarters of muted growth? Please highlight the companies where you expect an improvement?
We continue to expect more downgrades over the next few quarters even though the pace of downgrades will be slower. The information technology sector is one which might likely see some upgrades over the next few earnings season.
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If you were to take contrarian bets at this stage, which sectors and companies would you choose and why? What are your views on the banking, construction/infrastructure and the consumption related stories? Are there any stocks here where one can invest?
We believe it may be worthwhile adding a higher beta, deleveraging play as a contrarian bet to help safeguard the portfolio against an RBI rate cut or a further "risk-on" rally. Some of the beaten down and leveraged industrial names, which have some visibility on projects, could rally in such a scenario.
Or for the large cap investor, the conglomerate in the same sector can also be bought. The lead private sector mobile services provider, which has recently borne the ire of the markets, can be bought from a longer term view given its financial strength. And once tariffs are raised, all the “noise” around sustainability of their business will be negated.
What are your estimates of where the rupee, crude oil prices and gold are headed in FY13? How strong are the chances of them upsetting the market rally?
We expect the INR to remain range-bound around the current levels for now and appreciate to Rs 53 per dollar by December and Rs 51 per dollar by March 2013.
Dated Brent should average $107/bbl for FY13. We have forecast gold at $1710/oz in 2012. Any move in oil below $100/bbl or above $120/bbl should impact the Indian markets positively or negatively. Gold imports coming off should have a positive bias on the rupee, which in itself should spur investments.