After rallying over 25 percent in 2012, the Indian market has begun the New Year on a strong note. The Sensex ended at 19,580, up154 points. The Nifty rose 46 points to close at 5,950.
The market gained on the 'fiscal cliff' news from the US. The fiscal cliff pressure on the US has eased as the Senate voted in favour of a deal that raises taxes for the wealthy. The Senate voted 89 to eight in favour of the deal in a bid to avert the fiscal cliff. The proposal will now go before the House of Representatives.
In an interview to CNBC-TV18, Tushar Pradhan, CIO of HSBC AMC says the market may see a new high in 2013. "I think that is partly due to the fact that even a very simple mid-teen growth from hereon will take you there because the past peak was about 21,000," he elaborates.
According to him, the timing is pretty critical because many events are likely to unfold this year. "They could either take it up quickly or it might have to be a lot more patient wait before we get there," he adds.
New year 2013: Market may give 15-18% returns by Feb-end
Below is the edited transcript of his interview on CNBC-TV18.
Q: Do you believe that the market is set to touch its new highs, perhaps even in the first quarter of calendar year of 2013 or do you think it will have to be longer?
A: I do not know exactly when it will be. But I do believe that there will be a new high. I think that is partly due to the fact that even a very simple mid-teen growth from hereon will take you there because the past peak was about 21,000. So, that isn’t too much from here.
But the timing is pretty critical because many events are likely to unfold this year. They could either take it up quickly or it might have to be a lot more patient wait before we get there.
Q: What about earning season? What is your expectation? How much of a trigger do you think it could be for the market?
A: I think earnings are going to be pretty flat, around 7 to 8 percent growth. Even next year, 12-month, growth is somewhere between 13 to 14 percent. So, the market seems to be going up clearly not on expected earnings growth, but obviously on something else. I think this something else is possibly an expectation of either reforms push, or continued global liquidity. That is worrying.
The fundamentals are not showing that the earnings are going to go through the roof. We do not see a clear change in the investment climate. We do not really see an investment cycle beginning. The optimism obviously in the market is there for some reason, but clearly not earnings.
Q: Do you think retail investors, who haven't participated in the market yet, should wait and watch for more triggers to pan out or is this a good time to put some money at work?
A: It is always a good time to put money to work in the equity market at any given time. However, one has to realise that it is going to be held for a longer period of time. That is when the returns come. So, if one is likely to time the market then it may not work out the way that most investors would want it to.
The clear point to be made here is that if you look back, in the last 12 months we have made a return of close to 27 percent on the Nifty. Going forward, if earnings growth remains between 10-15 percent at maximum, we already have had a year where the growth in the market has been twice of that as the earnings growth already. That means that the market has been rerated.
Now, do we expect further rerating from here? I think that is unlikely. That means one should be accepting the fact that reasonable returns can be expected out of the equity market, nothing out of the ordinary. Here ordinary is still good. We are talking about 14-15 percent return. That is very likely to happen, given the fact that we are in a situation where we have already made about a 30 percent gain over the previous year. So, retail investors should be well informed about what they need to do, given the risk situation. But it is just as fairly valued as one can think. If one has a longer term objective then this year is as good a year to start investing in equity.
Q: Within the Nifty, a lot of bullish calls have come in with regards to PSU banks based on valuations, parameters. What is your call with regards to PSU banks?
A: There has been a huge dichotomy in the valuation matrix between the public sector banks and the private sector banks. I think, more or less, the fears regarding asset quality have been out in the open. People are now aware of the extent of the problem.
However, how we go forward also is also very crucial because if you see the impairment in the book for most of the public sector banks, it has come slightly above expectation. So, unless there is a quick revival in the economy and we feel that there is strength in the economy, going forward, valuations may not really re-rate.
The current argument is that public sector banks are much cheaper than private sector banks. But if you incorporate a significant impairment in book value because of the expected losses around either a malfunctioning of the credit cycle, if that gets fully priced in then I do not think we are really cheap.
However, if we think that we are in for not for extraordinary credit down cycle and we will come out of that situation in some form of action and we approach normalcy then clearly there is a great valuation opportunity in the PSU banks. As we all know they are pretty solid banks. There have a tremendous deposit network all across the country. Resources by way of cheap deposits are always available. Capital is an issue with most of the public sector banks. But if you are talking about, more or less, normal credit growth then I do not think that should be a hindrance at least for the next year going forward.
In that sense, yes, there is an opportunity in public sector banks area. Infact, I will extent that even for the rest of market where seems to be a fairly large distinction between some companies, which are trading at very expensive valuations and some other companies, which are being beaten down well below their intrinsic value. The, overall, opportunity in the equity markets today is to find well and mean reversion is likely to happen. Mean reversions is a very strong play that we have seen every market actually repeat year in and year out.
There is plenty of opportunity in the equity markets. If one focuses on the under valued side of the story, there is significantly higher returns to be made than the average that I am talking about.
Q: Do you see higher returns in the FMCG space?
A: First of all, they are trading at a historic high price-to-earnings (PEs) for even their own historical PEs. We know FMCG always trades at a premium to the market. But the current valuations that they are trading are much higher than their own historical PEs that they have traded at.
Earning is exciting at the moment, especially in the FMCG space. That would lead us to believe that, even if earnings do come up, for example, if there is a lot of consumption which continues to sustain this year, returns from these companies might be a little lower than other companies which may see either an investment cycle revival or for that matter a change in the environment of more optimism in the main manufacturing sector. So, the returns, if one were to look at it, would come from outside of FMCG rather than through FMCG.
Q: Would it be an opportunity to look at something as beaten down as metals or maybe infrastructure and power, especially in light of impetus on reforms?
A: Yes. That might be an interesting place to look at. One of the things we are also getting in addition to the other economic data is that China manufacturing is picking up. That is a very large key to overall growth.
However, if the US goes back into recession, if the fiscal cliff issues are not resolved and if higher taxation and lower spending causes the US economy to go into recession then this Chinese spring of higher manufacturing may actually even beat it out. So, a lot depends on how the fiscal cliff negotiations do occur.
What we hear is that there is some sort of a loose arrangement where people seem to be agreeing between the Democrats and the Republicans in the US. But, going forward, it will be very crucial because that will determine whether there is an up swing in global economic growth. Then that will lead to more interesting valuations and returns in the metals area.