Jeff Chowdhry, head emerging markets, F&C Investments says a 10 percent move on the Nifty is easily possible for the rest of 2013.
Chowdhry also said that, apart from 2-3 companies many companies have reported good earnings. Select private banks like HDFC Bank and ICICI Bank will continue to do well going ahead and IT sectors continues to looks attractive from valuation point of view.
Below is the edited transcript of his interview to CNBC-TV18.
Q: What is happening in Europe, the market is reading the German data positively; a rate cut is expected from the ECB. How do you see data moving forward and do you think market is right in expecting a rate cut from ECB?
A: In last couple of weeks there has been a sea change in sentiment. Last year the story was austerity, cutting back on fiscal and now in last couple of weeks the market is talking about measures to introduce growth. The market is right now focusing on government which will not only focus on cutting expenditure but they were also looking at measures to improve growth. This sentiment has helped in last couple of weeks.
Q: Europe is facing the big change is depreciation in the yen, which directly hits Germany so we saw the DAX falling seminally a few days back. Does that change the contours of whether growth or inflation will be looked at by the ECB, after all the big bulwark against printing more euros or going the whole hog on growth or lessening the importance of inflation came because of the German position. Now if Germany itself is finding competition from Japan, would it be that this opposition will decline and you will see a more euro printing, a more growth oriented ECB?
A: Yes, is the answer to the last question. The depreciation of yen does affect certain parts of the industries. Many governments and many people in Europe are now saying in terms of austerity either enough is enough or if we carry on with this austerity we will have a depression for the next 50 years. I think the mood has changed now and people believe that they have to be tight in terms of fiscal deficit and expenditure and at the same time push growth policies. This is the change that has taken place in last 2-3 weeks.
Q: What are you expecting from the ECB?
A: The ECB is constrained essentially in terms of monetary policy they will keep interest rates low, monetary policy will continue to be loose.
Q: What is your call on India? Three weeks back we were talking about whether it is a bear market for India and now all of a sudden we are talking about new foreign institutional investor (FII) money, we are talking about visiting the old highs for our markets. Do you think the macro really has turned or are the markets getting a bit ahead of themselves now?
A: What we are seeing from recent earnings is that apart from one or two disappointments, companies have delivered good earnings. The earnings of HDFC Bank was good. Cooling of commodity and oil prices gives India flexibility in terms of interest rates and particularly on back of inflation and other factors companies continue to deliver earnings and we remain pretty constructive on the markets.
Q: Will banks remain your top picks in India especially private banks?
A: HDFC Bank and ICICI Bank are well-run banks, and I think they will continue to do well. We also like companies with pricing power. We continue to like ITC like we have done for a very long time, software sector is starting to look interesting again. So, there are a number of areas where private sector companies are doing reasonably well and the valuation is not too bad. So, we are pretty constructive on a number of companies.
Q: What kind of an upside therefore would you look at for the Indian markets itself? Do you see the Nifty delivering 10 percent upsides from hereon in 2013?
A: I think that’s easily doable. I think the individual companies that we cover were looking for more upside, as with any market it is very difficult to simply make an index call because the index is made up of some very poor companies and some good companies. Ten percent is easily possible, but for some private sector companies in particular who are delivering earnings we would expect 15-20 percent return this year.
Q: The growth story doesn’t look very good even if some of the macros have changed for the benefit of India, for instance crude prices or inflation going down. Growth is not visible when you look at order books of companies or you look at even your capex plans or even consumption levels. Where would you bet in growth terms?
A: There have been a lot of studies and analysis done over several numbers of years that growth doesn’t necessarily lead to higher stock market in many situations. The important point is how the companies’ particularly private sector companies respond to either a low growth environment or not a very attractive environment. So, top-line is obvious, but we got to look at the bottom-line.
So, we have had some periods of lower growth in the past and private sector companies have done well. Clearly, the deep cyclicals are exposed very much to the end consumer. One has to be careful about the two-wheeler manufacturers or the four-wheeler manufacturers. One would not expect L&T to do better in this environment but they are doing well. One has to be careful while saying that growth is poor as that would mean everything in the capital goods or cyclical space is poor, that’s not the case.
Q: We saw in the early part of the year a tendency of funds flowing away from emerging markets and into the US and into Japan as well. How do you think things will pan out from hereon? Will these remain favoured markets considering that we got a lot of weak data out of the US? Which top 2 or 3 assets will be chased over the next quarter?
A: In the first few months of this year developed markets of the US and Japan had seen a majority of the flows partly because the US numbers over the last 4-5 months have been pretty good and data from China has been soft. It is a combination of these two factors. A lot of that has already happened and in next 3-6 months people will realise that the US story isn’t fantastic and the emerging market story is better than it was a few months ago.
So, I do see some reallocation of flows and the reason why I say that is because the valuation anomaly between emerging and developed market has widened again i.e. emerging markets are cheap again, relative to developed markets. So, I do see a reallocation of flows and also those companies which have been hit on Yen weakness, I think those companies will bound for example, this morning Mahindra Motors was up 6 percent and that company suffered as a result of perceived weakness of the yen and that's the good example where expectations are very low.
Q: Do you think commodities will continue to remain beleaguered?
A: Yes. People have talked about the super cycle and demand for commodities etc. Commodity demand from China will remain relatively low now going forward, having said that some individual companies which are linked to the commodity space have been hit very hard indeed. So some share prices may rebound, but I don’t have high expectations for a big rebound in commodity prices.