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Global equity markets have seen a liquidity driven rally since the past few months. While the global environment continues to be supportive of a move into the equity segment as an asset class, Ramanathan K, ED and CIO, ING Investment Management (I) tells Puneet Wadhwa in an interview that the Indian markets’ valuations are fair but not cheap. Edited excerpts:
What are the likely triggers and risks for the global and domestic markets you are now looking at for a breakout on either side?
Global risk appetite continues to improve as key macro worries – break-up of the European Union (EU), China hard-landing and recession in key developed economies are being addressed. Immediate concerns on the fiscal cliff in the US have also receded, which is a positive for global investor sentiment. Hence, we believe the current global environment continues to be supportive of a global move into equities.
The key risks to global markets over the next six months are political uncertainty related to US debt ceiling, a phase of soft data releases from China and the escalation of geopolitical issues in the Persian Gulf.
In India, the Government continues to use the window of opportunity to push through reforms and make tough decisions. Recent policy initiatives have aided investor sentiment. However, equity markets in India continue to be driven by the foreign institutional investors (FIIs). In the absence of domestic flows, any reversal in flows due to a change in global risk environment could lead to a correction in Indian equities.
Do you find the Indian markets’ valuation attractive, or better, than peers in the emerging markets?
The Indian markets have, over the past year, got re-rerated with valuations moving up (for the Sensex) from around 13.5 times to around 15.5 times FY14 EPS. Given the rerating, valuations are fair but not cheap. Earnings growth needs to catch up for valuations to sustain and improve from current levels. Till then the markets could move in a band.
How do you view the recent statements by the Reserve Bank of India regarding inflation, growth and the overall macros? What will be your strategy in this backdrop for the next 6-12 months?
While upward risks to inflation remain, inflation is expected to remain range-bound in FY14, thus providing room for further rate cuts, albeit not so aggressively given rising concerns on India’s twin deficit problem. Our base case remains that of a cumulative 50–75 bps repo cut spread out over the year. We have increased weights of interest rate sensitive sectors such as banking and industrials in our equity portfolios over the last few months. We believe these sectors will benefit from a gradual recovery in the domestic macro situation over the next few quarters.
What about the debt segment?
We are also running high durations in our long bond funds to capture the yield movement due to rate cuts. We believe that the market movement will not be a one-way street either for equities (one way upward move) and yields (one way downward move) and hence there is a need to actively manage portfolio (need to prune stocks/sectors where valuations have overshot fundamentals) or reduce duration (if yields have come off too-fast, too-soon).
Are you optimistic about capex cycle revival?
Capex has remained particularly weak since December 2010. A rise in the ratio of investment to GDP is required to help generate productive capacity, and is crucial to kickstart a virtuous cycle of higher growth, without a rise in inflation challenges. We believe the government is moving in the right direction.
The recovery process, however, could be slow given the impending uncertainty of General Elections in H12014 and gains will be back-ended.
Public Sector Undertakings (PSUs) with large cash surpluses are likely to take the lead in spurring capex, but the positive impact of the same on earnings of capital goods companies will not be visible in the immediate future.
Can you elaborate your stance with respect to the auto and banking pack?
The fall in demand in autos has been due to a combination of various factors such as high fuel prices, higher interest rates and weak consumer sentiment. Consequently a meaningful pick-up in demand will depend on how the interplay of these factors pans out over the next few quarters. While a reduction in interest rates does improve the affordability of cars, the imminent hike in diesel prices over the next few months could continue to dampen consumer sentiment. Moreover valuations for frontline auto stocks continue to be stretched.
We are positive on the banking sector, as we believe the sector will be a key beneficiary of monetary easing over the next 12 months. Moreover we believe asset quality for PSU banks will gradually improve over the next few quarters and the recoveries cycle will commence towards the latter part of CY13. Despite the recent run-up, valuations for PSU banks continue to be attractive.
What will be your strategy now as regards the realty pack? A lot of large- and mid-cap stocks from this space have been on an upward spiral recently.
We do not hold any realty stocks in our equity portfolios. While realty stocks may appear cheap on net asset value (NAV) basis, these stocks are not attractively valued on other parameters such as Price-to-Book (P/BV) or Price Earnings (P/E).
How do you see the government's divestment agenda playing out over the next few quarters?
We do expect that the government will continue to focus on divestment of its stakes in public sector undertakings. The expected divestment of NTPC should be reasonably well accepted by institutional investors, especially given that recent divestments by the government have been at a discount to prevailing market prices. However, larger divestments such as sale of government’s stake in Hindustan Zinc are likely to be delayed given the complex legal issues in the transaction.
