Both European and US investors are very positive on India, but with elections not too far and the uncertain political scenario, they are hesitant to invest heavily in the country. That’s the view coming in from Bhuvnesh Singh, head of research at Barclays Capital.
Singh, back from touring European countries, says investors are waiting on the sidelines for more clarity on the political front, after which one can expect India to attract huge FII inflows.
Talking sector-specific, Singh says he is overweight on the four-wheeler pack, expecting interest rates easing by another 75 bps in the next six-nine months.
Barclays is also overweight on the healthcare sector, Lupin, Sun Pharma and Apollo Hospitals are its top bets from the space. “Investors find consumer stapes more expensive than healthcare stocks, so they prefer latter than former.”
Below is the verbatim transcript of his interview on CNBC-TV18
Q: You have been on a trip talking to a lot of European investors. What’s the general feedback you came away with?
A: I have been out for last three week talking to European and US investors. Both the European and US investors remain very positive on India. They are looking at interest rates coming down, they are looking at inflation numbers, they are looking at positive sound from the government and they are looking at gold and oil prices coming off.
On the other hand, given that election in India will be just next year that is holding back their hands. There is a lot of uncertainty about the politics in India, which is why most investors are unwilling or hesitant to commit significant sums to India right now.
So, net-net, they are waiting on the sidelines. As we see political certainty coming, I am sure that a lot more inflows could come to India at that time.
Q: Any colour that you can fill in terms of the kind of investors you saw at this congregation. Were they mostly old India investors, are they long only investors or are these Exchange-Traded Fund (ETF) trackers who are looking at the region, and how much to allocate in India in that context?
A: The meetings were all across though the majority of investors would be long only; a mix between old India investors versus regional and global guys who are looking at how much to allocate to India.
The concerns on politics and the positives on the recent government statements and positives in terms of oil and gold prices coming off - that is all across. So everybody understands simple things about India.
Q: There was quite a debate about consumer discretionary - a space that actually only till recently was the biggest overweight for foreign institutional investors (FII). What are they making of that space and what do they expect to see in terms of earnings performance from that pocket?
A: Consumer discretionary is an interesting space. We are seeing four wheelers, where the car sales numbers in India are not that good. We are seeing two wheelers, where we are seeing significant competition. So in that space, it is very difficult for FIIs to suddenly become much more aggressive. Tata Motors is a completely different case. It is not that much India focused.
So. there is a lot of debate based on how the numbers continue to look for in this sector say for next six-nine months. Specifically, if we see GDP growth rate correcting; last quarter was bad and in this quarter we might very well see expectations trending down. So, investors are confused.
Our view is that consumer discretionary specifically four wheelers should be overweight. We are taking a call on interest rates coming off sharply over the next six-nine months probably to the extent of 75 basis points in India, and that would give a lot of support to this sector.
Q: One sector which seems to be generally overweight in most portfolios is banking. Did you find that in your trips with most investors or your talks with most of them? What were you advising them on that sector specifically?
A: Banking sector is facing a conglomeration of various issues if I would say. We like the sector, specifically the private sector banks and that is one space which we would like to be in.
Though, on the other hand, with the GDP growth rate numbers most likely disappointing over next three-four quarters, it is difficult to be significantly overweight in this sector.
Our view to investors have been to stay away from public sector banks and to focus more on private sector banks and keep a market neutral position on this. Top picks of course would be banks like HDFC Bank or Axis Bank for example.
Q: You also have an overweight on energy. Did people buy that stance easily or was that view debated?
A: Energy was highly debated, specifically because we do not have Reliance Industries as an overweight, which we all know is a significant portion of the index.
Our view on energy is more bottom up based. So stocks like Cairn India for example or BPCL where we think that exploration assets are significantly under valued. These are the stocks which we like on bottom up basis. It also helps at least for BPCL or oil marketing companies given that government is making right moves in terms of the retail price diesel that should again help the sector to an extent.
Q: What did you hear about healthcare because there too things have been quite disparate? While Ranbaxy is struggling with some recent news flows, Sun Pharma has been a huge outperformer. Did you see that these stocks are very well owned by the investors you met?
A: Healthcare yes. I would not say that Ranbaxy is well owned, though most investors really like Sun Pharma, we like Sun Pharma. Along with that, we also like Lupin and Apollo Hospital, which our other two picks in this sector. So healthcare has been a consensus overweight and most investors prefer healthcare over consumer staples, which they find is much more expensive.
Q: What did you get in terms of feed back on IT because that has also been quite volatile, Infosys earnings this quarter did not help much? Were people confused?
A: IT is one sector, which I also cover as an analyst. Hence, the debates there were more intense.
The views are mixed on IT services. Though, on Infosys, the views are very simple. Out of the number of investors we met, there are only two investors who hold an overweight position in Infosys. So I would say it is a consensus underweight. After the significant volatility in the stock over the past 8-10 quarter around the results, I do not think that investors are willing to take big bets on this company as of now.
Other stocks like HCL Technologies, TCS and to some extent Cognizant are the three stocks, which are well liked across the investor base.
Q: Which were your biggest underweights on India which you conveyed to these investors?
A: We are very cautions on India’s GDP growth rate and within that we are specifically cautious about the capex oriented sectors. We have seen that over the past 20 years as we did a analysis of election years, in a pre-election year, usually the capex comes off sharply in India. Hence, the capex oriented sectors like capital goods and materials are two significant underweight in our portfolio.