Global issues will not gain prominence from here on: Sethuram Iyer

Q&A with chief investment officer at Daiwa Mutual Fund

Sethuram Iyer, chief investment officer at Daiwa Mutual Fund spoke to Aastha Agnihotri on market outlook for 2013. He expects the infrastructure sector to do well and suggests that the retail investors may remain in a wait-and-watch mode at the current levels. Edited excerpts:

How are you approaching the year 2013? Do you think we could, in any way, replicate the gains that we saw in 2012 or do you expect it to be a year of consolidation?

I don't think it will be a year of consolidation, rather we expect market to progress in 2013. At this time, we have seen series of reforms and promises of more to come. The government is taking initiatives to put the economy back on track and especially in the infrastructure space. Though it is difficult to take a call on 2013, we don't expect significant downturn unless political side fails to perform.

Moreover, market participants and experts expect growth bottoming out. Hence if we want to see GDP (gross domestic product) of let's say 7–8%, it has to come from spurt in infrastructure activities.

What is the next major cue that the markets will focus from here-on?

I think there were a lot of worries over US 'fiscal cliff' but at the same time, there was a belief that solution will come out. We expect US government to reach a deal in next two months, as the US is unlikely to sacrifice steps taken so far to revive growth.

Before US, we had concerns over sovereign debt crisis and euro-zone leaders stepped in to solve the issue.

Also China is witnessing recovery in growth. So, when world's two biggest economies are seeing progress, the overall prospects for global economies improve. I don't think global issues will gain prominence from here-on.

What about the Reserve Bank of India’s policies?

RBI policy will not be a major cue for markets, rather it should be political developments. Investments have been dried up completely and until we see impetus in Infrastructure space, growth will not bounce back. The trigger has to come from political side.

The focus will also be on Budget, which will be last for this government. We expect populist steps which may not revive economic growth, but off late, there were noises of pronouncements from Delhi that government needs to address fiscal deficit and reduce subsidy burden. Thus, probably some populist element may be there but fiscal deficit might be tackled.

What are your expectations from RBI’s next policy review? Have markets already factored in a rate cut in January?

The RBI policy may result in a rate cut as early as January but market has virtually factored it so we may see slight amount of reaction to the cut but not a major movement. If RBI goes ahead with a 50 basis points (bps) rate cut in January, then it may not cut rates in quick succession. We may not expect another rate cut until July.

In 2012, a lot of heavyweight sectors like banks participated in the rally. Do you see more follow-through or do you think there will be a new lot of sectors to lead the next leg of the rally?

I think it will be Infrastructure sector which needs to be given lot of prominence and this is where investment is needed. This will also boost banking space. Therefore if economy is reviving, this will boost all sectors.

At this point in time, it's difficult to look at individual names in this space. There is lot of guess work as to where growth will come in, in this basket (Infrastructure). One doesn't know which part of Infrastructure will get activated and what is the sequence.

What about earning season? How much of a trigger do you think it could be for the market?

Third quarter earnings will be broadly in-line with last quarter. I do not expect significant major surprises. However, autos especially two-wheeler segment may improve marginally but the other side looks stagnant. IT (Information Technology) will also be similar to Q2. Therefore, I do not see earnings to be a major trigger for markets.

How are you seeing the trend of inflows into the Indian markets this New Year? Will it be anywhere closer to 2012?

Inflows depend on where markets are headed. The rally that we have seen is based completely on sentiments and not on fundamentals. My guess is we could see 10–15% gain in the Indian markets in 2013.

However, if we do repeat 2012 gains of 25-30%, the market valuations will go out of control. On the flip side, we don't see significant improvement in earnings also. So fundamentally things may not be that great but valuations will rise significantly.

Today, the foreign institutional investors (FIIs) find Indian markets lucrative but if valuations peak out there could be some stress and pressure will be built.

Do you think retail investors, who haven't participated in the market yet, should wait and watch for more triggers to pan out or is this a good time to put some money at work?

Retail investors are hesitant to come in and want some more assurance that this rally will continue which is unlikely. See, most of the domestic investors lost after 2007 and some have not even recovered their losses. So they have not made enough money in past six years and are not very enthusiastic about the current market move. We expect 'wait and watch' mode for some more time.