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Dinesh Thakkar, chairman and managing director of Angel Broking, speaks to Jinsy Mathew about the various factors weighing on markets and the pockets he would bet on in the current market environment. Edited excerpts:
Given the political situation in India, where are the markets headed? Is there a possibility of further downside?
Due to global and domestic uncertainties, the market has witnessed considerable correction in the last couple of days. Though the pull-out of the Dravida Munnetra Kazhagam is a setback to the government, I see no threat to the completion of its term.
The worry on investors' minds is reforms have taken a backseat. Though I had expected some populist moves by the government close to the general elections, the political situation that has transpired is likely to make the passage of legislative reforms slightly challenging now as well. However, I expect the government to continue with reforms that do not require parliamentary approval, as we need to continue attracting strong capital inflows to finance our current account deficit.
How do you see the European markets panning out, given the situation in Cyprus?
Concerns around the Euro area had abated somewhat. The global uncertainty that arises from Cyprus brings those fundamental concerns to the fore.
I believe at this point, there is no imminent systemic risk to the Euro zone. The deal proposed by the European Union has been rejected by an overwhelming vote in the Cyprus parliament and the government is now renegotiating a politically palatable deal, which has greater likelihood of being passed.
The broader picture is the country got a tough deal, since its banking system was so over-extended and there were political issues. I don't expect this to set a precedent for policy action in other Euro zone economies. What is positive is the European Central Bank has assuaged concerns by indicating it would continue providing liquidity to Cypriot banks to prevent their collapse. That should signal the commitment of policymakers to preserve the Euro zone.
In India, do you see macroeconomic indicators such as food inflation easing any time soon?
In February, food inflation was in double digits for the third consecutive month. The food basket contributes substantially to wholesale price index (WPI)-based inflation. Elevated food inflation is also leading to a divergence between the two measures of inflation---WPI and CPI (consumer price index)-based inflation, making inflation management a challenge for the Reserve Bank.
The positive news on the inflation scenario is manufactured inflation and core (non-food manufactured) inflation have decelerated, owing to factors such as the Reserve Bank of India (RBI)'s hawkish stance and weaker pricing power for manufacturers. This has led to moderation in headline inflation.
What is your outlook on the banking space? Would the recent allegations against some banks (ICICI Bank, HDFC Bank and Axis Bank) hit the fundamentals of these companies?
I guess one would have to wait for RBI's assessment. I think the recent news didn't indicate deeper issues in the overall governance of these banks. Rather, this was likely to have been restricted to some of the operational staff. Some tightening on KYC (know-you-customer) norms and internal processes is likely. But there wouldn't be any major impact beyond that.
Would you say this is good time to buy stocks?
Yes. With the recent correction in the market, I would recommend investors to invest in good-quality companies with strong fundamentals and reasonable valuations. I believe the downward trajectory for inflation and interest rates is positive for the growth outlook and, consequently, for earnings growth and markets.
Which pockets are you bullish/bearish on?
Since interest rates have peaked, I'm bullish on stocks in the cyclical space, with a healthy safety margin. In this space, private banks remain a favourite, as they have strong capital adequacy and have maintained better lending standards. This is now being reflected in their asset quality, which is far better than that of public sector banks. Through the medium term, we will have to assess the impact on competition, as new banks enter the space. But as of now, existing private banks remain a 'buy'.
I'm overweight on the automobile segment, since long-term structural growth drivers of the domestic automotive industry such as gross domestic product growth, favourable demographics, low penetration levels, entry of global players and easy availability of finance are intact. These factors should support growth in automobile volumes, especially for four-wheelers. I prefer automobile stocks that have strong fundamentals, high exposure to rural and export markets and superior pricing power.
Among defensives, I recommend stocks with growth at reasonable values. I prefer the information technology (IT) sector and have a top-down approach, as I expect large-cap IT companies to outperform. To some extent, pharmaceutical companies, too, remain a good bet.
