More important than projecting an exact figure for the Sensex or Nifty as a year-end target is the market direction, Jignesh Shah, executive director, Sarasin-Alpen (India) Pvt Ltd, tells Puneet Wadhwa. Edited excerpts:
Do you expect fund flows to gather steam in the remaining part of the fiscal? How are the foreign institutional investors (FIIs) viewing the macro economic developments in India?
We believe FII inflows would be driven by various global macro-economic factors. The strong domestic growth story has been a positive in attracting FIIs from a long-term perspective. However, over the short term, inflows will be driven by factors such as near-term growth, interest rates, inflation, and global events like sovereign debt. Risk aversion and preference for emerging markets (EMs) will also be a factor. Thus, it is difficult to predict FII inflows in the second half.
What is your outlook for the Indian equity market? How do we compare with the other emerging markets (EMs)?
Over the medium to long term, India offers a superior investment opportunity. However, there are headwinds in the near term, like political incidents, relatively low level of entrepreneurship, higher inflation, impact on corporate profitability due to high material and finance costs.
India is approaching the long-term historical valuation average, while a few other EMs (including China) are already below the long-term average valuations. Accordingly, we expect below-average performance for the sensex on YTD ($) basis for India, as compared to other EMs.
Which sectors/themes, according to you, offer value from a medium-term perspective?
Our preferred sectors have been banking, engineering, capital goods, health care and consumer discretionary sector (including automobiles).
Because of the above-mentioned headwinds, defensive sectors are doing well. But, once interest rates peak out, we may see interest rate sensitive sectors like banking, automobile, getting back on track.
More From This Section
Undervalued sectors like capital goods and engineering will start performing only as decision-making (in private as well as public sector) regains momentum.
Have you changed your year-end targets, given the macro-level headwinds? What is your investment strategy at current levels?
Rather than projecting the exact number of Sensex or Nifty, as a year-end target, more important is the direction. We have seen earnings downgraded for these indices, because of margin pressures and slowing demand. However, the decline in prices of commodities and food should have a beneficial impact for the equity market.
With macro headwinds likely to settle in the next couple of months, one may position the portfolio accordingly. In fixed income, we may see bullish expansion, with shorter-end of the yield curve softening. One may partly lock-in at current high yields. Gold can be added for diversification, where we have a long-term positive view.
Lot of stocks, especially engineering and construction, have corrected significantly. Is value catching up on these?
Yes, but the macro-economy factors need to improve for value to get unlocked. Hence, it will continue to test investor’s patience for some more time. When investment cycle re-starts, the advantage to these stocks would be operating leverage.
There are a lot of weak data coming out of the US. How high is the probability of double-dip recession there, and how would it affect the EMs?
Our view is, despite all the short-term economic risks and medium-term slowdown scenarios, it is worth remembering that the global economy is better in contrast to 2010 (when double-dip recession fears ran high).
Bank lending has been relaxed and corporate and consumer credits are increasing. Corporate in developed economies are cash rich. While we are not expecting double-dip, the EMs are better placed in relation to developed economies.
