Key policy reforms at the domestic and the global level have seen liquidity chase stocks the world over, and India has been no exception. Toral Munshi, Head of India Equity Research, Credit Suisse Wealth Management tells Puneet Wadhwa in an interview that investors would now look for evidence on implementation of reform measures and resultant change on the ground before putting in more money into the Indian markets. Edited excerpts:
Do you think equity markets across the globe may be entering into a quiet phase for the next few months given the sharp run-up?
Global markets are currently in a consolidation mode after the gains witnessed post the US Federal Reserve (US FED), the actions of the European Central Bank (ECB) and better macro data. The consolidation trend is likely to continue in the short-term with investors focussing on the earnings and US politics in the near-term. Over the next one – six months, we expect the global equity markets to provide further upsides.
Can the slowdown in China send the global markets into a tailspin?
I would believe the earnings decline expectations in China are widely anticipated given the economic deceleration. NBS regularly discloses all industrial companies revenue and profit data, the latest January – August earnings growth was already -3.1 per cent year-on-year (y-o-y).
What is Credit Suisse’s portfolio / investment strategy vis-a-vis India? What are the key concerns / factors that investors should brace themselves up for at the global and in the Indian context that could send the markets lower?
In terms of the equity strategy, we continue to have a large-cap bias currently with an overweight on interest rate sensitive sectors, such as Automobiles, Financials, Infrastructure and also Pharmaceuticals.
Our key underweights are in Materials, Telecom and information technology sectors. Investors need to recognize that economic conditions in the world still remain fragile. Euro-zone and US fiscal cliff concerns would re-emerge from time-to-time. For India, the two key risks could come from a sharp spike in crude prices or the inability to revive the investment cycle.
How do you see the next few quarters panning out with respect to the foreign institutional investor (FII) flows in the Indian equity space?
India’s share of cumulative FII flows over the past 15 years has been about 20 per cent among EM (42 per cent in BRIC), much in excess of its MSCI weight. I expect the pace of the flows to slow from hereon, as many investors have now probably cut their underweight on India.
They would now look for evidence on implementation of key policy measures announced and resultant change on the ground, before the next rush of inflow happens. I think most investors are aware and cognizant of the political risks associated with the reform process.
What about India Inc's results for FY13 and FY14?
As regards India, the current earnings season is likely to be tepid, reflecting the slow pace of the local economy. Expectations are not very high and I believe that we may be approaching the end of the downgrade cycle. In my perspective, management guidance's are going to be more relevant than actual numbers.
Which sectors and stocks your assessment could be potential winners over the next one year?
We continue to have a bias towards the interest rate sensitive sectors, though they are not as cheaply available now, as they were a year ago. While the financial sector was our top pick in 2012, infrastructure could emerge as a key opportunity for 2013, especially if we start to see signs of a pickup in the investment cycle. Also as we move into 2013, bottom up stock picking is going to be more relevant than catching the right sector trends.
According to the recent Global Wealth Report, what are trends seen in India? As the global wealth is seen diminishing, how is India placed in this scenario?
The CS Global Wealth Report 2012 finds that from mid-2011 to mid-2012, the aggregate global household wealth fell by 5.2 per cent in current dollar terms to $223 trillion due to the economic uncertainties of the past year – particularly those affecting the euro-zone.
India has also seen an erosion of 20 per cent in wealth in USD terms, but this to a large extent can be attributed to currency loss. In constant exchange terms, wealth per adult has seen a marginal increase in India in 2012. Infact, India has seen rapid growth in wealth since the year 2000 at a rate of 8 per cent annually. Wealth per adult in India has risen $5,300 from $2,000 in 2000. Given the 29 per cent rise in the adult population, aggregate wealth more than tripled during the same period.
The wealth report also highlights the low penetration level of financial assets in India (just 15.9 per cent of gross assets versus 43.1 per cent of gross assets in Europe and 67.1 per cent in North America). The indebtedness levels of households in India is very low – household debt as a percentage of gross assets is 16 per cent in Europe and 18.1 per cent in North America, but only 3.7 per cent in India.