The global equity markets will remain subdued unless governments in the US and Europe take strong measures to stimulate growth and solve the financial crisis. As the world stares at a slowdown in growth, the Indian market would continue to be volatile and move in tandem with the global markets, says Jyoti Vaswani, CIO & Director, Fund Management, Aviva India, in an interview with Puneet Wadhwa. Edited excerpts:
How are you viewing the developments in the US and euro zone? Do you expect a fresh round of sell-off in equities across the globe?
Equity markets across the world witnessed a sharp decline, amid negative global cues arising out of the US sovereign downgrade, European debt crisis and fears of a global slowdown. Given the possibility of a recession in the US and a definite slowdown in global growth, India cannot remain completely immune to this slowdown. In such a situation, the common theme is and will remain a big reduction in investors’ risk appetite.
Till the time, the governments or central banks are able to take some strong measures to stimulate growth in the US and find ways to solve the financial crisis in Europe, the equity markets are expected to remain subdued. The Indian markets would continue to be volatile and move in tandem with the global markets. Hence, we should see the markets consolidating and remaining range bound in the near term.
Has the correction in the Indian equity markets been overdone? Do any stocks/sectors appear worthy of investment from a medium-term perspective?
The correction is really part of the global correction in equities, but it does bring forth some opportunities in the form of lower valuations. The fact that earnings growth in India is unlikely to slow significantly, despite a global slowdown, will support valuations. We also see some earnings downgrade risks but the market is overly pessimistic at this stage. Headwinds of high inflation and tight liquidity remain, but are probably baked into valuations. Consumers, pharmaceuticals and telecom are defensive bets due to the relatively non-elastic nature of consumer spends on these services. Sectors like banks and infrastructure provide value at current levels, despite some challenges that they will continue to face in the near term, in the form of higher NPAs and high interest rates.
Construction sector stocks such as IVRCL, HCC and Nagarjuna Construction, among others, have under-performed since the past one year. Is the tide turning for them on fundamental grounds?
We believe the current market conditions present a good opportunity to buy quality construction stocks. We are bullish on the infrastructure space, including power, capital goods, engineering and construction. These companies have been beaten down by slow execution and high interest rates. The major problem facing these companies is that of cash flow. They will get respite only after interest rates fall and significantly ease pressure on earnings. We believe the rewards outweigh the risks decisively from here on, and therefore we remain positive on the Indian infrastructure space. The inexpensive valuation is the silver lining in the present environment.
What is your view on interest-rate sensitive sectors — banking, auto and realty — given that the Reserve Bank of India (RBI) may hike rates again in its September review?
We expect inflation and interest rates to peak over the next two quarters. The RBI may raise rates by another 25 basis points (bps), but we believe that we are largely at the peak of the rate cycle. Another round of quantitative easing by the US continues to pose an upside risk to the inflationary trajectory. Although there may not be any major upside to interest rates, they will continue to hold reasonably high to keep interest costs for corporate India elevated. Given these factors, auto and realty may continue to face demand pressure in the near term.
However, we are positive on the banking sector in India with a medium-to-long-term perspective. We think banks and infrastructure can be the immediate beneficiary of this trend, whereas auto and realty may take some time as rates have to fall significantly, to show a reversal in trend.
Are you fully invested at current levels? How do you plan to churn your portfolio over the next three to six months?
We have cash between 10-15 per cent across funds. Our approach is stock-specific and we will continue to increase equity allocation in case of further market corrections. We are deploying cash depending on stock specific valuations and outlook. We believe the rewards outweigh risks decisively for India from here on and any fall will be used to build a strong portfolio for the future. A portfolio should be well diversified to minimise long-term risk.
