Quantum Securities Director Neeraj Dewan tells Krishna Merchant that government policies can help underperforming Indian markets bounce back. Edited excerpts:
Markets have bounced after last week’s battering. Can the markets sustain at these levels?
Equities across the globe were oversold and, hence, those bounced back. Crude oil prices have corrected as the crisis in Libya may be coming to an end, which is a positive sign for the markets. The road ahead will depend on the policies devised in Europe, the US and India. India has been the most underperforming market since January, because of the interest rate tightening regime. Also, reforms will play an important role. If the government introduces reforms faster, it will help the markets.
Has the political risk gone up for India, given strong protests for the anti-corruption reform?
From our interaction with institutional investors, it seems they are concerned about the corruption in India. The Commonwealth Games (CWG) and the 2G spectrum scam had brought heavy negative publicity. In the short term, the political risk for India is growing.
There was a second wave of sell-off last week on concerns of European banks’ exposure to debt in the euro zone. How big is that problem?
There was a lot of short-selling in banks because of this concern. The policy in Europe will be based on how to handle banks’ exposure in the euro zone. If there is no concrete policy action, the banking sector may take a big hit.
Given the weak recovery in the US, do you feel the Federal Reserve will introduce a third round of quantitative easing (QE3)?
The US Federal Reserve (Fed) may do something different this time, besides quantitative easing (QE) because the first two rounds did not really help improve economic conditions. On the contrary, those led to a rise in commodity prices. Fed may focus on improving jobs this time.
Do you think the Reserve Bank of India (RBI) will pause its tightening cycle, given the global recession worries?
RBI can halt the interest rate tightening cycle during its September policy because the minutes that were released a few days before indicated that the members were not in favour of another rate increase in September.
Is it a good time to invest in the market?
All the negatives, like global uncertainty, government inaction and high interest rates are priced into the market. Investors should not invest in the defensive sectors like fast moving consumer goods (FMCG), as those have not corrected much. Instead, one should look at sectors that have corrected heavily and are available at good valuations. Banking (Axis Bank), autos (Mahindra & Mahindra), oil & gas (BPCL, HPCL), capital goods (Larsen & Tourbo) and Metals (Tata Steel) are good bets. Investors should avoid stocks that have a high exposure to the US and European markets, until clarity emerges on the policy front there.
When do you expect the earnings downgrade cycle to bottom out?
The rate tightening has affected growth in India, as companies may have withdrawn a part of their investment cycle. The earnings downgrade cycle may bottom out in the second quarter, when interest rates may start easing. Also, third quarter onwards, we may see a fall in inflation.
