Key policy reforms at the domestic and global levels have seen liquidity chase stocks the world over, and India is no exception. Toral Munshi, head of India equity research, Credit Suisse Wealth Management, in an interview with Puneet Wadhwa, says investors would look for implementation of the reform measures, as well as resultant changes on the ground, before putting more money in Indian markets. Edited excerpts:
Given the sharp run-up, do you think equity markets across the world might be entering a quiet phase for the next few months?
Currently, global markets are in a consolidation mode after gains following action by the US Federal Reserve and the European Central Bank, and better macro economic data. This trend is likely to continue in the short term, with investors focusing on earnings and US politics in the near term. Over the next one to six months, we expect global equity markets to provide further upsides.
Can the slowdown in China send global markets into a tailspin?
I believe there are wide expectations of a fall in earnings in China, given the economic deceleration. NBS regularly discloses all industrial companies’ revenue and profit data. The data for growth in earnings in the January-August period showed a 3.1 per cent fall year-on-year.
What is Credit Suisse’s portfolio/investment strategy for India? What are the key factors investors should brace for at the global and domestic levels?
In terms of the equity strategy, currently, we have a large-cap bias and are overweight on interest rate-sensitive sectors such as automobiles, financials, infrastructure and pharmaceuticals.
We are underweight on the materials, telecom and information technology sectors. Investors need to recognise economic conditions across the world are still fragile. Euro-zone, and US fiscal cliff concerns would re-emerge from time-to-time. For India, two key risks could come from a sharp rise in crude oil prices and inability to revive the investment cycle.
What is your estimate of foreign institutional investor (FII) flows into the Indian equity space in the next few quarters?
India’s share of cumulative FII flows over the past 15 years has been about 20 per cent among emerging market economies (42 per cent in BRIC), much higher than its MSCI weight. I expect the pace of flows to slow from here, as many investors have now probably cut their underweight on India.
Investors would now look for evidence on implementation of the policy measures announced and the resultant changes on the ground, before the next rush of inflow happens. I think most investors are aware and cognizant of the political risks associated with the reform process.
What about India Inc’s results for FY13 and FY14?
The current earnings season is likely to be tepid, reflecting the slow pace of the local economy. Expectations are not very high and I believe we could be approaching the end of the downgrade cycle. I think the guidance by managements would be more relevant than the actual numbers.
Which sectors/stocks could be potential winners over the next year?
We continue to have a bias towards interest rate-sensitive sectors, though these are not as cheaply available now as they were a year earlier. While the financial sector was our top pick this year, infrastructure could emerge as a key opportunity for 2013, especially if we start to see signs of a pick-up in the investment cycle. Also, as we move into 2013, bottom-up stock picking would be more relevant than picking the right sector trends.
According to the recent Global Wealth Report, what are the trends seen in India? As global wealth is seen diminishing, how is India placed?
The CS Global Wealth Report 2012 says from mid-2011 to mid-2012, aggregate global household wealth fell 5.2 per cent in current dollar terms to $223 trillion, owing to the economic uncertainties of the past year, particularly those affecting the Euro zone.
India has also seen a fall of 20 per cent in wealth in dollar terms. But this, to a large extent, can be attributed to currency loss. In constant exchange terms, this year, wealth per adult has seen a marginal rise in India. In fact, India has seen rapid growth in wealth since 2000 — eight per cent a year. Wealth per adult in India rose to $5,300, compared with $2,000 in 2000. Given the 29 per cent rise in the adult population, aggregate wealth more-than-tripled in the same period.
The report also points to the low penetration of financial assets in India (just 15.9 per cent of gross assets, against 43.1 per cent of gross assets in Europe and 67.1 per cent in North America). Indebtedness levels of households in India are low — household debt, as a percentage of gross assets, stands at 16 per cent in Europe and 18.1 per cent in North America. In India, it is only 3.7 per cent.
