 "Besides liquidity, markets will take cues from growth: Abhay Laijawala")
What do you think of the outcome of the meeting of the US Fed’s Federal Open Market Committee (FOMC)? When is the US Fed likely to raise rates?
Relative to areas on which the Street was generally concerned, we see the FOMC’s statement of “considerable time” as an indication the Fed will be on a hold mode. And, it has said the economy is expanding at a moderate pace and labour market conditions improving somewhat. At the same time, it has added there is significant underutilisation of labour resources. So, broadly, the policy is status quo, with some degree of hawkishness, though only at the margin.
What explains the mixed reactions across Asian markets?
Hong Kong could have been weak due to China-related factors. We have generally seen Chinese markets being soft. Following the Fed meeting, we have seen yields on US 10-year bonds rise a tad. Before the policy announcement, these were at 2.59 per cent and closed marginally higher at 2.61 per cent, indicating the reaction of bond markets was muted.
Also, the dollar showed some signs of strengthening, rising to 1.28 against the euro. The movement might also be a consequence of fear over what happens in Scotland on Thursday. I am surprised no one in India is giving much cognisance to the Scottish referendum, which could be an event of global macro risks, in case Scotland opts for independence.
We have seen Europe consider QE measures, even as the US prepares to wind down its bond purchase programme. What are the implications of this for the global economy and markets?
We are seeing very interesting trends. The US is withdrawing from QE, but given the weakness and continuing deflation-related concerns in Europe, prospects of an ECB (European Central Bank) QE remain high. But more than QE and its implications, we need to assess what is happening to global growth. Equity markets, apart from infusion of liquidity (Europe can potentially offset tighter liquidity conditions elsewhere), will take cues from what happens to global growth. As far as global growth is concerned, we remain very positive on the US, and remain at the margin on Europe. That is, we still expect growth in Europe this year at 0.8 per cent.
China’s central bank is said to be injecting 500 billion yuan ($81 billion) into the five biggest state-owned banks in that country. How should one interpret this?
China is only infusing liquidity into its banking system. This doesn’t change anything for India.
How will flows into emerging markets pan out through the next 6-12 months?
With the strengthening of the US economy, flows into emerging markets will probably be impacted. Through the next 6-12 months, we see investors differentiating between emerging markets, in terms of markets that will be able to weather the US Fed’s QE exit better. Therefore, investors will look out for macroeconomic fundamentals and the relative external vulnerabilities of the individual emerging markets.
Which emerging markets will be able to manage this better and which will be at risk?
We believe India will stand out as this trend plays out, given the significant improvements in the external vulnerability indicators — the current account deficit and the relative stability of the rupee. In addition, through the last two-three months, consensus GDP (gross domestic product) growth estimates for many emerging markets have been cut, but those for India have been scaled up. Recently, the OECD (Organisation for Economic Cooperation and Development) released an assessment of global economic growth in which it slashed the growth forecasts of most economies, India being an exception.
How does India appear as an investment destination? Will foreign institutional investors be willing to put in more money?
Investors will primarily consider how the earnings cycle pans out. So, considering earnings expectations for FY15 and FY16, between 15-18 per cent consensus earnings, seen rising to about 20 per cent through the December quarter, we believe investors will continue to pump in money.
What are the other triggers for Indian markets?
The macro economy, as well as how the government moves towards big-bang reforms. At this point, we are watching developments unfold in New Delhi; investors are watching what the government is doing. The government is taking proactive measures to move things on the ground. But the markets will need to see action on reforms such as a rise in the FDI (foreign direct investment) cap in insurance, the rationalisation of fuel prices and other second-generation reforms such as constructive progress on GST (goods and services tax).
Do you think this has become a ‘sell-on-rise’ market rather than a buy-on-dips one?
We continue to have a very positive view of the markets. We have a December-end target of 28,000 on the BSE Sensex.
By when do you expect the Reserve Bank of India to alter its policy stance?
Looking at the projected inflation till the end of 2015, it appears there won’t be room to cut rates in a sustainable and credible manner for another year.
How do you see key macro variables such as the rupee and inflation pan out through the next 6-12 months?
We expect the rupee to be at 60-62 against the dollar. We believe India will embark on an East Asian model, under which the rupee will stay weaker for a long duration. While we don’t expect the rupee to depreciate, we don’t expect any significant appreciation, too.
How so valuations seem? What’s your market/portfolio strategy amid this backdrop?
The market is trading at 16 times the one-year forward earnings, which doesn’t appear stretched, given the support of 16-17 per cent earnings growth (compounded annual growth) over FY15-16.
In terms of our portfolio strategy, we like consumer discretionary, banks (private and select public sector ones) and oil & gas companies, particularly those that will benefit from subsidy rationalisation.
Does this factor in geopolitical risks?
The Scottish referendum will be out of the way soon. So, the locus of geopolitical risks will again shift to what happens in Iraq and how the US deals with the Islamic State. During the worst of the crisis, if oil prices stay range-bound around the $100/barrel mark, we see a reasonably low probability of these events leading to any major spurt in oil prices. That’s because demand estimates have been scaled down by the International Energy Association (IEA). At the beginning of the year, the IEA had pegged global demand at 1.3 million barrels a day, which was slashed to about 0.9 million barrels a day last week. Second, there are positive supply-related responses, including shale gas increase in the US.