 "Second half of FY14 will be challenging for markets: Dilip Bhat")
Developments across the Euro zone and domestic issues impacting the political landscape have seen the markets go into a tailspin of late. Dilip Bhat, joint managing director of Prabhudas Lilladher, the Mumbai-based financial products agency, tells Puneet Wadhwa the markets will remain volatile and investors should be prepared for a roller-coaster ride. At the global level, the US could see significant investment flows, on the back of economic recovery. Edited excerpts:
2013 has seen nervousness again creep into the markets. Do you think global equity markets, including India, are headed for a steep correction, given the economic and political developments?
It has been volatile since January, with Indian markets accentuating this with their own turn of events - the Budget, political uncertainties or the lack of right noises from the Reserve Bank of India. Internationally, the fact that a small country like Cyprus could rock the world in such a torrid manner indicates the underlying fragility and fear in markets worldover. The gush of global liquidity which has swamped the equity markets have led the surge in indices everywhere.
Most global indices are at multi-year highs or life-time highs, irrespective of whether it is complemented by the fundamentals of their own country or whether there has been a rush of foreign institutional investor (FII) money in those countries. It's like a well-synchronised global bull run. Given the altitudes these indices have scaled, one should be prepared for a roller-coaster ride.
The ratio of opinions that have emerged indicates the dollar is certainly headed for better times, notwithstanding the short-term movements. America's overall economic parameters do indicate that howsoever small or insignificant these might be, it is firmly on a recovery path. By the same corollary of the twin support, the US could see significant flows for investments. Whether it is true for all developed economies, I don't think so - especially Europe, which remains in deep trouble and can hold hostage the current overall optimism.
Could key macros like the current account deficit (CAD), inflation and interest rates, in the Indian context, spoil the pace of FII flows that began last year? How do the emerging markets, especially India, figure on FIIs' investment radar?
These three are very tricky, sticky and complicated issues. If you add GDP (gross domestic product) growth and fiscal deficit, then it completes the picture. The CAD in particular, which denotes a gap in investments and savings, looks a lot more chronic in nature. The gradual rise in diesel rates will prevent any significant sobering of inflation, the CPI (consumer price index) being more worrisome.
Unless GDP growth shows signs of strong recovery, it will put our economy in a vicious circle. These are very sensitive issues for FIIs. How long they ignore these and continue to bet on India remains speculative. But as of now, India has been a major recipient of FII flows among emerging markets.
How are you approaching the markets now? Do you think they will remain in a limbo till the general elections get over in 2014?
India will broadly follow the same trajectory as the rest of the world indices, give and take some under- or over-performance. It will not be largely different. While we may keep on introspecting on political uncertainties, economic reforms and the rest of the issues, which will have some impact on our index, by and large, we will follow the international trend in indices.
Having said that, I feel the markets might try to scale up to around 6,100 on the Nifty by April/May. The challenge will be in the second half of the financial year (H2FY14), where the Nifty could head south of 5,500, on the back of several international and domestic events. The event of election is generally marked by policy paralysis, fear of populist measures and, worse, deterioration in the general economic situation. So, these will weigh heavily.
Would you increase allocation to debt at the current juncture?
As interest rates are in the process of softening, increasing allocation to debt is difficult to justify. Rather, invest in balanced mutual fund schemes.
Has the market corrected enough for you to start cherry-picking? Have you made downward revisions to India Inc's the earnings estimates, given the headwinds?
Irrespective of the levels of indices, it has been a stock picker's market now for quite some time. So, EPS (earnings per share) growth for FY13 has been scaled down to around eight per cent from 15 per cent at the beginning of the year. The base being already low, we have an estimate of around 17 per cent growth in the Nifty EPS for FY14, which remains vulnerable to downward revision, unless GDP recovers to grow strongly in FY14.
Private sector banking and select NBFC (non-banking finance companies) stocks like Muthoot Finance and Manappuram Finance have been in the news recently. How are you approaching this space now?
NBFCs remain an attractive space, as interest rates head south. IDFC remains our top pick in this space. Their net interest margins could expand, delivering a better return on assets and return on equity. The challenge remains on credit growth and containing non-performing assets if the economy continues to be in a rut. We also like LIC Housing and Mahindra & Mahindra Financial Services. ICICI and Axis are our preferred bets in the banking pack.
What about the automobile sector? Are there any good fundamental stories?
Automobiles remain on our watchlist. Both falling interest rates and softening raw material prices will be positives. Volume decline is to a great extent in the price of the stocks. Maruti Suzuki and Bajaj Auto offer good plays. Mahindra and Mahindra continues to do well.
Real estate stocks have been hammered badly. Is there a recovery in sight? What about mid-caps that have reportedly seen margin calls getting triggered? Are there any stocks in this space that you like?
Though real estate has all the trappings of a good play, most of these are mired in controversies which far overshadow the true potential of these stocks. At best, one can trade in these, provided one is good at doing so. DLF appears to be the better bet. While a few mid-cap real estate stocks like Sobha Developers are there, they are not very liquid.
Mid-cap stocks in general have always remained undervalued, and save for a few which have delivered on the performance and stock price fronts, most have turned out to be damp squibs or disasters. Still, in this space we like Bharat Electronics, Federal Bank, J&K Bank, United Phosphorous and NIIT Technologies.
Do you think the government has less room to tinker with policies relating to the oil & gas, sugar and fertiliser sectors? How should investors play these spaces?
Sectors like these which remain hostage to government policies can at best form part of one's trading portfolio. It is very difficult to take secular long-term bets on these.
2013 has seen nervousness again creep into the markets. Do you think global equity markets, including India, are headed for a steep correction, given the economic and political developments?
It has been volatile since January, with Indian markets accentuating this with their own turn of events - the Budget, political uncertainties or the lack of right noises from the Reserve Bank of India. Internationally, the fact that a small country like Cyprus could rock the world in such a torrid manner indicates the underlying fragility and fear in markets worldover. The gush of global liquidity which has swamped the equity markets have led the surge in indices everywhere.
Most global indices are at multi-year highs or life-time highs, irrespective of whether it is complemented by the fundamentals of their own country or whether there has been a rush of foreign institutional investor (FII) money in those countries. It's like a well-synchronised global bull run. Given the altitudes these indices have scaled, one should be prepared for a roller-coaster ride.
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Global fund managers have turned optimistic on the outlook for the dollar and US equities, a recent survey showed. Do you think developed markets could garner higher FII flows this year?
The ratio of opinions that have emerged indicates the dollar is certainly headed for better times, notwithstanding the short-term movements. America's overall economic parameters do indicate that howsoever small or insignificant these might be, it is firmly on a recovery path. By the same corollary of the twin support, the US could see significant flows for investments. Whether it is true for all developed economies, I don't think so - especially Europe, which remains in deep trouble and can hold hostage the current overall optimism.
Could key macros like the current account deficit (CAD), inflation and interest rates, in the Indian context, spoil the pace of FII flows that began last year? How do the emerging markets, especially India, figure on FIIs' investment radar?
These three are very tricky, sticky and complicated issues. If you add GDP (gross domestic product) growth and fiscal deficit, then it completes the picture. The CAD in particular, which denotes a gap in investments and savings, looks a lot more chronic in nature. The gradual rise in diesel rates will prevent any significant sobering of inflation, the CPI (consumer price index) being more worrisome.
Unless GDP growth shows signs of strong recovery, it will put our economy in a vicious circle. These are very sensitive issues for FIIs. How long they ignore these and continue to bet on India remains speculative. But as of now, India has been a major recipient of FII flows among emerging markets.
How are you approaching the markets now? Do you think they will remain in a limbo till the general elections get over in 2014?
India will broadly follow the same trajectory as the rest of the world indices, give and take some under- or over-performance. It will not be largely different. While we may keep on introspecting on political uncertainties, economic reforms and the rest of the issues, which will have some impact on our index, by and large, we will follow the international trend in indices.
Having said that, I feel the markets might try to scale up to around 6,100 on the Nifty by April/May. The challenge will be in the second half of the financial year (H2FY14), where the Nifty could head south of 5,500, on the back of several international and domestic events. The event of election is generally marked by policy paralysis, fear of populist measures and, worse, deterioration in the general economic situation. So, these will weigh heavily.
Would you increase allocation to debt at the current juncture?
As interest rates are in the process of softening, increasing allocation to debt is difficult to justify. Rather, invest in balanced mutual fund schemes.
Has the market corrected enough for you to start cherry-picking? Have you made downward revisions to India Inc's the earnings estimates, given the headwinds?
Irrespective of the levels of indices, it has been a stock picker's market now for quite some time. So, EPS (earnings per share) growth for FY13 has been scaled down to around eight per cent from 15 per cent at the beginning of the year. The base being already low, we have an estimate of around 17 per cent growth in the Nifty EPS for FY14, which remains vulnerable to downward revision, unless GDP recovers to grow strongly in FY14.
Private sector banking and select NBFC (non-banking finance companies) stocks like Muthoot Finance and Manappuram Finance have been in the news recently. How are you approaching this space now?
NBFCs remain an attractive space, as interest rates head south. IDFC remains our top pick in this space. Their net interest margins could expand, delivering a better return on assets and return on equity. The challenge remains on credit growth and containing non-performing assets if the economy continues to be in a rut. We also like LIC Housing and Mahindra & Mahindra Financial Services. ICICI and Axis are our preferred bets in the banking pack.
What about the automobile sector? Are there any good fundamental stories?
Automobiles remain on our watchlist. Both falling interest rates and softening raw material prices will be positives. Volume decline is to a great extent in the price of the stocks. Maruti Suzuki and Bajaj Auto offer good plays. Mahindra and Mahindra continues to do well.
Real estate stocks have been hammered badly. Is there a recovery in sight? What about mid-caps that have reportedly seen margin calls getting triggered? Are there any stocks in this space that you like?
Though real estate has all the trappings of a good play, most of these are mired in controversies which far overshadow the true potential of these stocks. At best, one can trade in these, provided one is good at doing so. DLF appears to be the better bet. While a few mid-cap real estate stocks like Sobha Developers are there, they are not very liquid.
Mid-cap stocks in general have always remained undervalued, and save for a few which have delivered on the performance and stock price fronts, most have turned out to be damp squibs or disasters. Still, in this space we like Bharat Electronics, Federal Bank, J&K Bank, United Phosphorous and NIIT Technologies.
Do you think the government has less room to tinker with policies relating to the oil & gas, sugar and fertiliser sectors? How should investors play these spaces?
Sectors like these which remain hostage to government policies can at best form part of one's trading portfolio. It is very difficult to take secular long-term bets on these.