ICICI Prudential Life Insurance’s executive vice-president and chief investment officer, Manish Kumar, tells Priya Kansara Pandya that markets may trade sideways for most part of 2012. Edited excerpts:
How do you expect markets to pan out, given the steep rise since the past two months?
We expect our markets to give healthy double-digit returns in 2012. Since the markets have rallied by almost 20 per cent in the first two months, these may consolidate or move sideways for a substantial part of the rest of the year. I see a range-bound market in the near term. However, upcoming events like election results and Budget can cause some volatility.
With crude prices nearing new highs, do you think policy rate cuts will happen by March/April?
We are not seeing any sharp crude price rally from the current levels. Moreover, the other components of inflation, manufacturing or food inflation, are showing signs of softness since the last three-four months. Sequentially, the inflation momentum has also come down.
Further, liquidity in the banking system is tight and economy is indeed slowing down. Thus, easing rates is on the cards despite challenges from crude. The Reserve Bank of India (RBI) needs to cut the cash reserve ratio, and that may happen by mid-March. There is also a good possibility of repo rate cuts early next quarter. But substantial easing might not happen if crude prices were to remain elevated.
Can we expect a repeat of 2010 in terms of gush of foreign money?
Looking at the language of policy makers in Europe or the US, the thinking is that they would not only like to maintain an easy monetary policy regime, but also keep injecting money at regular intervals. I would not be surprised if we see foreign inflows similar to what we saw in 2010.
Do you think India’s outperformance over other emerging markets will continue in 2012?
Valuation is not much in favour of India after the rally. Indian markets are more expensive than those in China and some other regional markets. It’s unlikely to outperform other emerging markets with a substantial margin from hereon. If oil prices continue to remain high, our ability to outperform will be even more limited, as our economy is more vulnerable to high oil prices than that of some other countries.
What sectors do you think have run ahead of fundamentals? What are you bullish on from a five-year perspective?
Rate-sensitive sectors like banking, metals and automobile don’t look expensive even after the rally, as their stocks have only done a catch-up after the sell-off in 2011. However, some capital goods companies look expensive, given the weak investment climate and execution challenges. Certain stocks in the fast moving consumer goods (FMCG) and pharmaceutical sectors are the most expensive, followed by technology.
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From a five-year perspective, we continue to maintain our positive view on private sector banking, consumer discretionary (auto sector) and telecom. We like select FMCG and pharma companies.
What’s your view on commodities (ex-oil), given China’s soft landing?
China has already started easing, hoping to maintain an eight per cent-plus growth. The US is also seeing signs of revival and Europe is seeing signs of stability. Finally, we are going to see an easy liquidity regime. All these factors would support or cause some strength in commodity prices, though it’ll be difficult to call for a substantial increase.
How do you see corporate performance in coming quarters?
Last two years’ sales growth of 20-25 per cent was helped by high inflation (price-led growth). With the economy slowing down, we expect sales growth to moderate to about 15 per cent next year. That is not unreasonable and is still a fairly good growth.
The operating margin pressure will ease, as commodity prices have cooled down, but may not come off completely. Interest costs are unlikely to go up as a percentage of sales. Thus, a bottom has been formed for the earnings growth momentum, though it’ll take some time for it to bounce. One would expect low double-digit earnings growth next year.
What’s your view on G-Sec yields, given the high fiscal deficit?
We expect G-Sec yields to remain in the eight per cent-plus zone. Unless the government structurally does something about the fiscal deficit, it’ll be difficult for bond yields to sustain below eight per cent. At the same time, any chance of yields rising to nine per cent is also ruled out.
How optimistic are you about the upcoming Budget?
The way the government has performed over the last couple of years, expectations from the Budget are not running too high. However, an optimism comes from the timing of the Budget.
State elections’ results would be out and if the ruling party emerges stronger, then it’ll have a greater leeway to undertake some bold measures. Also, between now and the next election in 2014, there is a window of opportunity. If the government has to do anything, this is the right time.
