DSIJ Mindshare

‘WE NEED TO SEE WHETHER INVESTORS ARE REWARDED OR DISAPPOINTED’

What is your take on the current investment climate of the country?

The interest has gone up since the new government has come into power at the centre. This is reflected in the foreign flow that has been strong while even the domestic flow has picked up. Both the flows have come in due to a lot of hope from the new government in terms of delivery and higher economic growth. It means they are expecting India’s GDP growth to become higher than what we have seen in the recent past. What it has done is that it has made many stocks expensive as it normally happens in the Bull market where lot of money flows in, and irrespective of the underlying fundamentals stocks move up primarily due to this money flow.

Today you see not much of a difference between a good company and a not so good company and valuations have become expensive. The basic change in the investment climate since 2013 is that in 2013 India was part of the fragile five. India’s CAD was wide, the rupee was weak, and it depreciated rapidly. Those have changed in 2014 but now everything is on the hope that things will improve. We need to see whether investors are rewarded or disappointed.

What is your outlook for the equity markets for 2015 and returns you are expecting for the year?

I do not have a view on a one-year basis at all. Our view is that the earnings numbers are still not very good; therefore the markets look expensive and unless the earnings numbers show signs of improvement, there is large scope for disappointment in equity returns. Our estimates are that the earnings growth over the long run should average at around 15 per cent. But right now the market expectation for CY2015 (based on consensus estimate) was close to 20 per cent but is now being revised downwards to 9 per cent. So in a normal market situation, the market would have collapsed by now as earlier a lot of money had come on the assumption of 20 per cent earnings growth. I believe India’s sustainable earnings growth is 15-16 per cent and it will take a few more quarters before we see that kind of trend emerging.

[PAGE BREAK]

Which are the global cues that you are looking forward to that will impact equity investment?

The global cues that I would look for would be the interest rates. I want the interest rate everywhere to normalise as lower interest rates are driving money to places with possibly higher growth rates and better yields. However, this flow is distorting the asset prices - be it equity, property or art. Normalcy in interest rate will help to reflect the right risk associated with that particular asset class. I believe that in the US the rates are going to increase by the month of June 2015. Temporarily this will impact flows as a lot of arbitrage money will flow out. However, long-term money will continue to come. In addition to normalcy in interest rates, global peace is much required. This is especially after the fall in the crude oil prices which may impact the Middle East and other oil exporting countries. This might even impact the flows from these countries that depend on petro dollars apart from impacting business opportunities which were focused on these countries.

What is your take on the interest rate front and what is the quantum of rate cut you are expecting for this entire year?

I personally feel that the choices with the RBI to further cut rates are very limited. I think they will look for sustainable lower inflation to cut rates further. The target is near 4 per cent and unless it comes to that level they may not cut interest rates aggressively. Secondly, if internationally the interest rates go up we will need to keep the spread at historical levels. So if the US interest rate moves up, I do not know if the RBI will be keen to cut rates here. However, if oil prices stablise at the current levels and inflation appears to be under control then there is a possibility of some more cuts. Some of these policy decisions will also be influenced by the annual government budget to be presented by the end of the month and the quality and direction of the fiscal deficit.

What do you make of the new way of calculating GDP and new growth figures? Will these have any impact on the equity markets?

I think immediately it will have no impact, the reason being it is still a new series and people have to understand it. The RBI also said that they will observe and study this before using the data for its policies. So at this point of time it is too early to say that decisions will be made on these numbers. If the GDP growth is as high as made out in the new series, the RBI should be more worried about slowing it down rather than increasing it. Anecdotally, if you look at a company’s growth numbers it does not indicate that the GDP is growing that fast. So one needs to understand the method of calculation and how each component is driving the GDP. I think the market will take its own time before reacting to a new series GDP number and till then they may go with the old series number.

What is your take on the present valuations of the Indian markets?

India does not look cheap; at the same time it is not too expensive even though it is still in the expensive zone. But it depends upon how you see market. I look on the basis of historical PE to decide the expensive status of the market. Even if you look at forward PE, it is expensive as ‘E’ earnings are dramatically cut, in which case the PE may look very high.

What are the sectors that you are currently betting on, and in which areas should investors take caution?

Right now we do not like FMCG, pharmaceutical, infrastructure, banks and capital goods because they look very expensive for us. The valuations of these sectors are not justified and are not reflected in the earnings’ trends of these companies. Apart from the above we like most of the other sectors.

What advice would you like to give retail investors at this juncture?

We have been telling investors that if you have Rs 100 to invest, invest only Rs 30 and take an SIP. Keep the balance ready to invest latter when valuations look better. That opportunity could come when the markets correct or some serious reforms take place. Both can happen. Or the market may not correct and some serious reforms may happen in which case you can invest the balance Rs 70. In such a situation the investor may lose the initial momentum in the stock price, but he will have a solid justification for investing, which in my mind is important.

Disclaimer

The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendation on any course of action to be followed by the reader.

DSIJ MINDSHARE

Mkt Commentary28-Mar, 2024

IPO Analysis29-Mar, 2024

Expert Speak29-Mar, 2024

Mindshare29-Mar, 2024

Multibaggers28-Mar, 2024

DALAL STREET INVESTMENT JOURNAL - DEMOCRATIZING WEALTH CREATION

Principal Officer: Mr. Shashikant Singh,
Email: principalofficer@dsij.in
Tel: (+91)-20-66663800

Compliance Officer: Mr. Rajesh Padode
Email: complianceofficer@dsij.in
Tel: (+91)-20-66663800

Grievance Officer: Mr. Rajesh Padode
Email: service@dsij.in
Tel: (+91)-20-66663800

Corresponding SEBI regional/local office address- SEBI Bhavan BKC, Plot No.C4-A, 'G' Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400051, Maharashtra.
Tel: +91-22-26449000 / 40459000 | Fax : +91-22-26449019-22 / 40459019-22 | E-mail : sebi@sebi.gov.in | Toll Free Investor Helpline: 1800 22 7575 | SEBI SCORES | SMARTODR