Toral Munshi, head of India Equity Research, Credit Suisse Wealth Management, in an interview with Krishna Merchant, said Indian markets might see a sharp correction if the situation in Europe worsens. She says foreign institutional investor (FII) inflows might remain volatile for the rest of the year, due to global uncertainties. Edited excerpts:
With domestic growth slowing and concerns over recession in the West, are Indian markets still valued expensively at 14 times one-year forward P/E?
Growth is certainly slowing globally, but recession is not our base case scenario as monetary policy remains supportive, credit is still expanding and corporate cash in the US is at a 55-year high.
We are certainly in an adverse global macro-environment and this can lead to extreme volatility in the equity markets in the near term. In Europe, financial stress in the inter-bank market has increased as the region grapples to find a viable solution for its debt issues. This is currently the biggest risk factor for equity markets, which may see a sharp correction if the situation in Europe worsens.
The historic average valuation for the Indian market stands at 14 times. In times of turmoil, there can be short-term blips and the markets can undershoot temporarily.
What is the probability of the euro-zone debt crisis snowballing into a full financial crisis? How would it affect the Indian markets and the economy?
There are several scenarios that could emerge in Europe. In the low probability event of a risk aversion-led global selloff, India cannot remain immune.
FIIs have invested Rs 1,474 crore so far this year, according to Sebi data. How do you expect these inflows to pan out by the end of this year?
The flows will depend on the combined outcome of the global situation, a pick-up in local growth and earnings outlook and a turn in the interest rate cycle. Historically, India has seen better flows in H2 (second half), compared to H1 (first half). In the current situation of uncertainty, flows are likely to remain volatile.
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According to a recent Credit Suisse report, risk aversion has been at its highest in the past decade, except in the two months after the Lehman incident. How are you preparing against risk in your portfolio?
One can manage risk through cash in portfolio, beta of the portfolio and individual stock selection. We are currently holding 17 per cent cash in our portfolio due to the short-term worries on global market conditions and have maintained the portfolio beta (measure of the volatility of the portfolio to the market) at low levels of 0.7, which limits the downside in volatile markets.
The RBI raises rates by 25 bps recently. Do you expect more rate hikes?
The rise of 25 basis points was in line with our expectations. Further action, as RBI indicated in its mid-quarter review, would be influenced by signs of downward movement in the inflation trajectory, driven by moderation in demand and the implications of global developments.
Which sectors look attractive in the current market condition?
Some interest rate-sensitive and cyclical sectors are now attractively valued. Investors should start looking at autos and banks selectively and use the next two-three months to increase exposure to the banking sector.
Some of the globally exposed stocks and sectors such as commodities and information technology (IT) have also seen a significant correction. Investors should wait for stability in the global financial markets and clarity on the global growth outlook before making allocations to these sectors. We are significantly underweight on materials and IT.
Some defensive sectors such as fast-moving consumer goods (FMCG) have given very strong outperformance in the current year and are trading at expensive valuations. We would advise some caution here and one should wait for dips to add.
Should investors continue to invest in fixed income products?
Investors should focus on asset allocation. Fixed income products are an essential element of investment portfolios.
Mature investors re-balance the fixed income and equity components of their allocation on a periodic basis in line with pre-decided asset allocation, irrespective of market conditions or returns. Investors should be adding to their equity exposure and trimming fixed income allocations to move towards their decided long-term allocations in the current equity erosion scenario.
Unfortunately, sentiment dominates the allocation to equities — there is greed when markets are bullish and investors are hesitant to trim their equities. And when markets are cheap, which is the ideal time to increase equity exposure, fear dominates investor sentiment.
