 "NRI bonds issue is an option in the near term: Neelesh Surana")
India's growth prospects look dim, amid a slew of negative macroeconomic data and the rupee's declining trend. Neelesh Surana, head (equity), Mirae Asset Global Investments, in an interview with Aastha Agnihotri, says considering the current environment, it could take time for the markets to stabilise. Edited excerpts:
Despite the poor macroeconomic data, foreign inflows have been supportive. How do you see the trend ahead?
It would be difficult to decipher the markets' near-term movement, given the volatility and reactions to multiple data points. So far this year, the markets have been flat. However, this doesn't reflect the huge underlying divergence in sector/stock returns. Pharmaceuticals, telecom, information technology and the consumer segment have been the top performers, while metals, public sector banks and capital goods have been underperformers.
Indian markets have been impacted by multiple headwinds, most of which are well discussed India-centric factors---those related to overall GDP (gross domestic product) growth, fiscal deficit, current account deficit, rupee depreciation, inclusion-related expenditure, poll-related anxieties, etc.
At a broad level, we are in the second year of low GDP growth which has been impacting many businesses, particularly those related to investments. While the government has adopted a few contentious reforms related to the oil sector---raising the prices of diesel, etc---most of it is negated by the rupee depreciation. Given the current environment, it could take time for markets to stabilise. We are also going through a phase of unprecedented aversion to equities, with retail investors being significantly underweight, in terms of allocation to equity/equity mutual funds.
In the last few weeks, Indian markets have been pretty volatile, owing to both global and domestic uncertainties. What are your recommendations to your clients?
We would take a long-term view, while dissecting past trends. The market decline has been a combination of domestic factors (as mentioned above), as well as global factors. As for investors, sustained market declines/volatility could be unsettling. However, it is important to realise market declines are cyclical and, therefore, natural. Many a time, the action required is 'nothing'---simply following well-disciplined asset allocation, with planned diversification. During the current phase, reversion to the mean has taken longer for Indian markets, owing to multiple headwinds. We expect meaningful returns to patient investors, as mean reversion would happen, in terms of growth, earnings, valuation and flow in equities. On asset allocation, investments should preferably be made through the systematic investment plan route.
How would the first-quarter earnings for India Inc pan out?
At an aggregate level, the first quarter of 2013-14 would be flat, given the macro headwinds of growth, interest rates and the recent fall in the rupee. However, the results would continue to be mixed, with pharmaceuticals, information technology and private banks likely to do well, and sectors such as cement, metals, public sector banks and capital goods likely to record pressure on earnings.
Considering the slump in industrial output and the jump in Consumer Price Index-based inflation, what are your expectations from the July monetary policy review?
The Reserve Bank of India (RBI) has to balance the objectives of currency stability, controlling inflation and promoting growth---probably in the same order. Given the conflicting nature of these objectives and the priority towards currency stability, we have seen measures in the short term to tighten liquidity. While the weak cues from IIP (Index of Industrial Production) and the continued easing of inflation is sufficient grounds for a rate cut, we expect RBI to defer this till the rupee attains stability.
Reports suggest India might soon issue sovereign bonds to curb the rupee's fall. Are markets factoring this in? What is your target for the rupee by the end of this year?
We assume structural solutions (though long-term) helping contain India's current account deficit, estimated at $75-80 billion, would be taken more positively by the market than bridging the gap through stop-gap measures. In the near term, RBI/government may take many measures to arrest the decline of the currency, such as the measure announced on Tuesday, with reference to interest rates. Among the options could be an NRI (non-resident Indian) bonds issue.
What sectors/stocks are you bullish on?
The markets have been polarised, particularly through the last year. At one end, valuations of the stocks of retail private banks, consumer staples, pharmaceuticals and media sectors are expensive. At the other end are stocks that are cheap but have multiple headwinds, in terms of earnings visibility/growth.
We believe significant value lies in between the two extremes. While we would prefer quality stocks that are better positioned to handle current headwinds, it is important to be selective, as now, many of these aren't cheap, particularly in the consumption space. At a sectoral level, we are overweight on information technology, private banks and pharmaceuticals.
Despite the poor macroeconomic data, foreign inflows have been supportive. How do you see the trend ahead?
It would be difficult to decipher the markets' near-term movement, given the volatility and reactions to multiple data points. So far this year, the markets have been flat. However, this doesn't reflect the huge underlying divergence in sector/stock returns. Pharmaceuticals, telecom, information technology and the consumer segment have been the top performers, while metals, public sector banks and capital goods have been underperformers.
Indian markets have been impacted by multiple headwinds, most of which are well discussed India-centric factors---those related to overall GDP (gross domestic product) growth, fiscal deficit, current account deficit, rupee depreciation, inclusion-related expenditure, poll-related anxieties, etc.
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At a broad level, we are in the second year of low GDP growth which has been impacting many businesses, particularly those related to investments. While the government has adopted a few contentious reforms related to the oil sector---raising the prices of diesel, etc---most of it is negated by the rupee depreciation. Given the current environment, it could take time for markets to stabilise. We are also going through a phase of unprecedented aversion to equities, with retail investors being significantly underweight, in terms of allocation to equity/equity mutual funds.
In the last few weeks, Indian markets have been pretty volatile, owing to both global and domestic uncertainties. What are your recommendations to your clients?
We would take a long-term view, while dissecting past trends. The market decline has been a combination of domestic factors (as mentioned above), as well as global factors. As for investors, sustained market declines/volatility could be unsettling. However, it is important to realise market declines are cyclical and, therefore, natural. Many a time, the action required is 'nothing'---simply following well-disciplined asset allocation, with planned diversification. During the current phase, reversion to the mean has taken longer for Indian markets, owing to multiple headwinds. We expect meaningful returns to patient investors, as mean reversion would happen, in terms of growth, earnings, valuation and flow in equities. On asset allocation, investments should preferably be made through the systematic investment plan route.
How would the first-quarter earnings for India Inc pan out?
At an aggregate level, the first quarter of 2013-14 would be flat, given the macro headwinds of growth, interest rates and the recent fall in the rupee. However, the results would continue to be mixed, with pharmaceuticals, information technology and private banks likely to do well, and sectors such as cement, metals, public sector banks and capital goods likely to record pressure on earnings.
Considering the slump in industrial output and the jump in Consumer Price Index-based inflation, what are your expectations from the July monetary policy review?
The Reserve Bank of India (RBI) has to balance the objectives of currency stability, controlling inflation and promoting growth---probably in the same order. Given the conflicting nature of these objectives and the priority towards currency stability, we have seen measures in the short term to tighten liquidity. While the weak cues from IIP (Index of Industrial Production) and the continued easing of inflation is sufficient grounds for a rate cut, we expect RBI to defer this till the rupee attains stability.
Reports suggest India might soon issue sovereign bonds to curb the rupee's fall. Are markets factoring this in? What is your target for the rupee by the end of this year?
We assume structural solutions (though long-term) helping contain India's current account deficit, estimated at $75-80 billion, would be taken more positively by the market than bridging the gap through stop-gap measures. In the near term, RBI/government may take many measures to arrest the decline of the currency, such as the measure announced on Tuesday, with reference to interest rates. Among the options could be an NRI (non-resident Indian) bonds issue.
What sectors/stocks are you bullish on?
The markets have been polarised, particularly through the last year. At one end, valuations of the stocks of retail private banks, consumer staples, pharmaceuticals and media sectors are expensive. At the other end are stocks that are cheap but have multiple headwinds, in terms of earnings visibility/growth.
We believe significant value lies in between the two extremes. While we would prefer quality stocks that are better positioned to handle current headwinds, it is important to be selective, as now, many of these aren't cheap, particularly in the consumption space. At a sectoral level, we are overweight on information technology, private banks and pharmaceuticals.