The government should focus on increasing FII inflows and enhance the investment climate in the country instead of announcing reforms which might take effect in the longer term, says Girish Nadkarni of Avendus Capital.
In an interview to CNBC-TV18, Nadkarni advises investors to bet on pharmaceutical and consumer nondurable stocks and commends the government’s move to revise gas prices.
Below is the edited transcript of the interview on CNBC-TV18
Q: What is your view on a possible downgrade of India's credit profile due to steep depreciation in the rupee and the possibility of a further withdrawal of liquidity?
A: There has been a sharp downturn in the fundamentals in the last two weeks. Investors are faced with a situation where the bond, currency and capital markets are down. The FII and FDI inflows that till date funded the current account deficit due to the difference in the yields in the US and India, have started to taper. This will increase the pressure on the rupee and that is not good for all the markets. So, I’m concerned, no doubt.
Q: What is your call on the equity market? Do you expect a further downside from the current levels of around 5,600?
A: There is a distinct possibility that the markets will fall further. The broad market has actually fallen much more than the indices have held up so far. However, there is increased pressure, in terms of sectors, on most components of the index, chiefly the banking segment which has a significant weight in the Nifty and the BSE Sensex.
So, with the changes that have happened over the last few weeks such as the increase in interest rate yields there will be some amount of pressure on banks. In the medium-term, credit quality will start to deteriorate further and this could push the equity markets further down.
Q: Thursday was witness to some large-scale, delivery-based selling in many blue-chip bank stocks. Are worried about the possibility of a huge crack in stocks such as HDFC Bank and ICICI Bank or would you worry about the midcaps and the broader banking space?
A: I think when money is withdrawn from the markets, there will be broad-based selling across stocks in the banking sector as well as other sectors. But there are some components of the Indian banking sector, such as housing finance, that are fairly resilient.
Hopefully there will be pockets of buying that will emerge in some of these stocks. There will be buying at the lower levels in bank-stocks that better asset quality. Banks with a stronger balance-sheets and credit quality will find support. I estimate that is how events will play out in the banking sector.
Q: From a policy perspective, how crucial do you think is the revision in natural gas pricing as compared to sectors such as the defence being opened to foreign direct investment?
A: In terms of policy, the most important challenge for the government is to lure and maintain the inflows of foreign capital into the country. This will involve speeding up FDI investment and opening up more sectors across the economy to FDI investment.
The gas pricing policy broadly resembles the commendable decision on deregulating diesel prices. Though the attempts to bring natural gas prices inline with international prices will have implications on the pricing of urea and the fertiliser subsidy, over a period of time it will certainly be positively viewed by the market. It will hopefully help invite new investments in sectors that previously subsisted on subsidies.
Q: In a market where most investment options are now out of the window, where do investors put their money now? Are you still hopeful about a revival in equities or is it just good to be high on cash?
A: Investors will have to balance their investment themes in two buckets. One, the way they play the markets for a period of one year and two, looking at equity markets from a three-to-five year perspective.
Investors looking at the market from a one-year perspective would tend to be long on the defensive sector where demand is not an issue and which is not impacted by most of the market volatility. So, consumer non durables and pharmaceuticals will be big beneficiaries in the whole process.
On a three-to-five year perspective, the equity markets are close to bottoming out in the next three to four months. With the spate of bad news from both the global and the domestic economy, this is often the time when markets turn. Investors will have to wait for the reversal in the interest rates and rise in yields to start buying in the equity markets.
Q: Would it make sense for the Food Security Bill to be passed given the precarious nature of the macroeconomic indicators?
A: I would think it is a political decision that the government has to make. From an economic perspective, it will push the fiscal deficit up. But what is matter of concern currently is not so much the fiscal deficit as much as the current account deficit (CAD). The government should right now initiate measures to lure investment and enhance investment climate in the country. That is far more important for the government in the immediate future.
Q: Are you advising any buys at this level or do you think investors need to wait for the prices of good quality stocks to fall as the market is headed lower?
A: From a short-term perspective, it is safe to buy some of the good quality domestic formulation companies in the pharmaceutical sector or exporters of generic pharmaceutical companies. Though consumer stocks are trading at highs demand will continue to be strong for the consumer nondurable segment and those are safer bets in the current market. From a three-year perspective one could buy most stocks, maybe a little cheaper from the current levels, across the board.