The markets have been facing resistance at the current levels, even as foreign institutional investor inflows are positive and there is no major negative news. Sandip Sabharwal, CEO, Portfolio Management Services, Prabhudas Lilladher, shares his views on the outlook for markets, corporate earnings and investment opportunities with Ashish Rukhaiyar. Edited excerpts:
Where do you see the benchmark indices at the end of the current calendar year?
After consolidating in a tight range over the past few months, we expect the markets are likely to break out on the upside in the second half of this year. By the end of the current year, the Sensex could be in the range of 20,000-21,000.
What are the three-four key issues, both positive and negative, that could impact the markets and that you’d keep an eye on?
Overall, a multitude of factors seem to be favouring a rally for the latter part of the year. Growth is much stronger than what people expect and there is still a huge amount of scepticism in the markets among investors. An intermediate top for the US dollar index, which should see the dollar lose value over the next few months, should keep the dollar carry trade alive. The spike up and cooling off of VIX, where the VIX seems to have peaked out for now and as volatility reduces, we should see greater flows into equity markets. Investor asset allocation has been more towards bonds and gold, and equities still have not got much flows in the current year, both from domestic and overseas investors. This should pick up as money flows from bonds to equities.
Among negatives, the biggest factors could be higher than expected inflation, which leads to greater than expected monetary tightening, and any event risk coming out of the euro zone, that is difficult to predict.
Despite some FII (foreign institutional investor) inflows in the recent past, the benchmark indices are still trading in a narrow range. It seems the market is not able to sustain the highs.
Markets have not moved up, as investors in general continue to be sceptical about the direction. As the markets have continued to remain in a range over the past several months, there is a lack of conviction to take strong positional bets. As such, most investors are underinvested in equities and have been on the sidelines. However, this phase is unlikely to continue for a prolonged period of time and we should actually see FII flows become stronger.
Is the bearish sentiment in Europe also leading to an increase in the foreign inflows in emerging markets, including India? What happens when the European economic scenario starts showing signs of revival?
The growth scenario for western economies continues to remain subdued.It is unlikely we are going to see any directional improvement in these economies of any significant magnitude. Given the state of their financial system and the high fiscal deficits, growth in these countries will remain slow. It is estimated that over the next five years, the average growth in the US economy will be 1.8 per cent, Europe 0.8 per cent and Japan 0.5 per cent. As against this, India is expected to grow at 8.5 per cent and China at 7.5-8 per cent. We expect there is likely to be a strong decoupling over the next decade, where there will be a directional flow of money from low-growth Western economies into high-growth emerging economies.
Do you think the high activity level in the mid-cap arena is a cause for concern?
On the contrary, I believe that today there is greater value in the broader markets. As in any bull markets, we will see some stocks move up much beyond their fundamental values. However, given the strength of economic recovery, a large number of small and mid-cap companies are likely to see huge operating leverage play out. The key is to pick the right kind of stocks and not get into the speculative ones.
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What is your outlook on the corporate results?
Corporate results should be strong, with a 20-25 per cent earnings growth. The earnings growth is likely to pick up for sectors like capital goods, banking and infrastructure companies, as execution picks up during this year. Overall, a 20-plus per cent year-on-year growth in earnings is likely over the next few quarters.
Which sectors are you advising your clients to invest and avoid?
We are overweight on capital goods, banking and infrastructure, and underweight on the commodity and technology sectors.
