The next three months would continue to be challenging for Indian shares, but there is a possibility of positives emerging from both local and global markets thereafter, says Anand Shah, chief investment officer at BNP Paribas Mutual Fund, in an interview with Mehul Shah. Edited excerpts:
Looking at the domestic and global events, where are the markets headed for in the next six-nine months?
From the last year to this one, while the challenges on the macro front remain, valuations have turned favorable. However, valuations alone cannot be a trigger for the markets to rally. Beyond three-six months, there is a possibility of positives emerging from both local and global markets. On the global front, we expect the uncertainty surrounding the European crisis getting resolved to a certain extent. On the domestic front, inflation is expected to decline, leading to interest rates being cut, along with measures taken by the government (we will have a Budget in between) to kick start investments and keep the consumption momentum going. In short, the next three months would continue to be challenging. But, given the current valuations, investors looking at India from a 5-10 year perspective may want to start investing.
What key positives are you expecting for the markets in the next few months?
We are not really expecting the optimism to come back in a hurry. But, one needs to be watchful about when the pessimism peaks. That would be the first step when the market would stop falling and show the first bounce. Because, today, the news flow, be it the local or the global front, isn’t getting better. We do not have a specific time horizon, but eventually, interest rates are expected to fall. Commodity prices should fall. Oil and metal prices should fall. That’s when the Indian consumption story will start kicking again. As the environment globally gets stable, even the foreign funds will start trickling in.
Analysts have been cutting the Sensex earnings estimates for FY13 and there could be further downward revisions. Do you think valuations have become really attractive?
Definitely, the markets are not at rock bottom valuations. While they corrected last year, we have segments that have appreciated and became more expensive. So, overall, price-to-earnings (P/E) ratios have not shrunk to levels for us to say we are at the extreme bottom. At the same time, the earnings downgrade cycle continues. So, while we are optimistic from a 6-12 month perspective, it doesn’t mean the market can’t correct further, given there is a room for valuations to shrink.
Which sectors you are betting on right now?
We like select companies and segments within the consumption space from a longer-term perspective. For example, telecom, which has continued to do well on the volume front, has now the pricing also looking up. Private sector banks and a few non-banking financial companies (NBFCs) that have their non performing assets under control may do well if interest rates were to fall.
Within the FMCG space, we are looking at some companies that have a significant pricing power, especially in the consumer staples space. We also like quite a few consumption companies, where the raw material pressures are coming down. With the depreciation in rupee, there may be segments within information technology (IT), pharmaceuticals, textiles that would benefit. There are stock picking opportunities in this market and we are trying to benefit from them.
Given the severe correction in stock prices, do you think there are opportunities for investors in the capital goods/engineering/infrastructure space?
Even as there are no blanket opportunities in the infrastructure space, there exist selective ones. Very clearly, what’s happening in the infra sector has a lot to do with the slowdown in the government or private capex, along with debt on their balance sheet, rising interest rates, global uncertainty, environmental issues, rising commodity prices, etc. Hence, a variety of factors have led to the correction in stock prices.
So, we are looking at all the factors that may have hurt the sector. We are definitely looking at select utilities and companies with assets on ground. Quite a few road projects look interesting.
Which kind of sectors/companies are a strict no-no in this environment?
Very clearly, we don’t like companies with stretched balance sheets — those that are undercapitalised and would need to raise money in this market. Such companies would be avoided at this point in time. Within sectors, we are looking at global commodities which are off our list. We have minimal exposure to metals. We are very selective within the banking space. Real estate is another segment we do not have exposure to. Also, companies with a huge exposure to capex cycle, like capital goods, are off our list.
