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Harshad Patwardhan, executive director and head of equities, JPMorgan AMC, tells Manu Kaushik now, markets are better prepared to cope with the US Federal Reserve tapering its bond-buying programme. He adds there is an upside to the market, with the election outcome acting as a potential trigger. Edited excerpts:
What risk does India face if the US Federal Reserve decides to scale down its $85-billion-a-month bond-buying programme ahead of schedule? Would you say tapering has already been priced in?
The reason why taper-talk caused a big shock in May was because it was completely unexpected at that time. But now, the surprise element isn't there, as much has been talked about and speculated on. Now, the Indian economy is much better placed to cope with it. The current account deficit (CAD) situation is under control; the exchange rate has, more or less, stabilised. So, the markets are more prepared. We expect tapering to begin sometime early next year.
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The state Assembly poll results will definitely have a bearing, as these capture the current mood of the electorate. But it’s important to remember while the market may have touched an all-time high, this is pretty much meaningless, as we are merely looking at the index number, not the valuations. Even in 2008, this (index) number was close to where it is now. It is important to look at valuations instead, which, at a PE (price-earnings) of 14x, are still below the long-term trading average. I believe there is upside to the market, with the election outcome acting as a potential trigger.
The market seems to be rallying purely on FII (foreign institutional investor) money. How should retail investors position themselves in such an environment?
If you look at the data for the past few months, FIIs have been net buyers, while domestic institutions have been net sellers; that has been the case for a while. But the risk-reward equation in the next one year is positive, as valuations are still attractive, below the long-term trading average.
Even if you take the election outcome out of the equation, growth seems to have bottomed out. September quarter GDP (gross domestic product) numbers were better than expected. Second, even corporate results for the quarter were better than expected; exports are edging up and even the CAD is under control.
So, many macro factors are now looking up, which suggests economic growth and earnings growth for Indian corporates will gradually accelerate. I am not suggesting we will be back to six-seven per cent GDP growth soon, but directionally, we’re definitely headed upwards, in terms of growth trajectory.
In our view, retail investors should increase allocation to equities. Equities have not been a popular asset class for some time. Investors are overexposed to fixed-income instruments, as well as gold and real estate. We believe through the next few years, the market will be driven by earnings growth, as well as valuation re-rating.
What is the likely FII reaction if a coalition comes to power in the event of the Bharatiya Janata Party failing to secure the requisite numbers in the 2014 general elections?
It will be a coalition; none of the opinion polls suggests otherwise. India has been run by coalition governments for the past 20 years. So, the question really is whether it is a stable and strong government, one that can take and implement decisions.
Is the Congress’s debacle in the state elections likely to put pressure on the fiscal front? Given the anti-incumbency sentiment against the United Progressive Alliance government, will there be increased likelihood of political pressure to limit expenditure?
Well, it is too early to say anything for sure because of many factors. First, the finance minister has committed to restrict the government's fiscal deficit to 4.8 per cent of GDP. Second, after the recent state election results, questions have been raised on whether populism helps secure votes. Last, there is hardly any time left between now and the elections; so, it will be difficult for the government to implement additional populist measures.
Do you see retail investors returning to markets due to the Narendra Modi factor after the elections or earlier?
Modi or no Modi, if you look at past behaviour, retail investors participate when markets are on a continuous uptrend. But in our view, investors should start allocating to equities in their portfolio instead of waiting, as the risk-reward equation is favourable right now.
So, should investors start switching to equities right away of wait for more clarity on Fed tapering?
It’s not possible to time it perfectly. I suggest investors under-allocated to equities start allocating right now. Things could be volatile because of tapering and elections. So, a wiser approach would be to spread out your investments through the next few months. In my view, instead of individual stocks, one should invest in diversified portfolios of mutual funds.
What are the sectors and themes you bullish on?
In our portfolio, we are bullish on financials such as private banks and select non-banking financial companies and neutral on public sector banks. Also, we’re betting on industrial and infrastructure stocks.
