Union Budget 2013 has largely met its key objective of fiscal consolidation, but it was an over hyped event so it punctured some expectations of foreign investors, says Gautam Chhaochharia, head of mid-cap research, UBS India.
The Union Budget 2013 largely met its key objective of fiscal consolidation, but it was an over hyped event so it punctured some expectations of foreign investors, says Gautam Chhaochharia, head of mid-cap research, UBS India.
India's widening fiscal account deficit has been a worry for FIIs and now the current account deficit issue has come to the forefront. However, foreigners continue to remain optimistic on growth opportunity in India and are ready to bet their chips subject to reform measures.
India's growth slowed to a 15-quarter low of 4.5 percent in the October-December quarter lower than the 5.3 percent a quarter ago, and the 6 percent growth seen a year-ago.Finance Minister P Chidambaram expects the economy to grow at 6.5 percent in the next financial year.
Chhaochharia feels 6% GDP growth would be good enough to revive corporate sentiment, but given the twin deficits the recovery of Indian economy is expected to be fragile going ahead.
Meanwhile, the key driver for Indian markets will be first quarter earnings and one can expect Indian markets to post double-digit returns this year, he adds. UBS India is bullish on Bajaj Electrical , Redington and Exide from the midcap space.
Below is the edited transcript of Gautam Chhaochharia's interview with CNBC-TV18.
Q: What are you hearing from your institutional clientele and whether the mood has soured significantly on India? Or do you think the worst in terms of selling pressure is behind us and people are willing to look at India in a more constructive light after this correction?
A: The mood is now again getting back to normal so to say. The expectations and the hype around the Budget were built up too much. In our view, the key objective of the Budget was the fiscal consolidation and that was largely met. But the hype around that was so much that it punctured some expectations for foreign investors.
It is coming back specifically after the Budget, the interactions by the finance ministry officials including the finance minister has gone a long way in terms of assuaging investor sentiment both on the tax issue and in terms of the entire Budget issue.
The mood is gradually coming back. Over last month the current account deficit has become the mean issue on the forefront for even institutional investors into India beyond just a fiscal deficit issue. So that issues has come to the limelight.
Beyond that, investors remain bullish on the growth opportunity in India and are still willing to invest in India subject to government keeping to its stance of continuing on the reform part ahead.
Q: How are you approaching trade now and what’s your sense of what we will have in the near to medium term? More downside risk or you think now the market can regain some ground, we have got the potential to make a 5-7 percent move in the upside?
A: I would say the later. The market definitely has the scope to move up from here both - through the next few months as well as over the medium term. The key driver for markets would be earnings and for that the key driver would be the delta in economic growth trajectory. It is not just the absolute number per se, but the delta would be important.
If we see the delta turning positive which is what I hope this year then that would drive up earnings as well as market so I would say so for the markets. Having said that, one should remember that unlike previous cycles of economic cyclical recovery this cycle is different.
The recovery is more fragile primarily because of twin deficit and more so because of the current account deficit. We have been telling investors that to be constructive and bullish on Indian equities, don’t expect a rerun of 2005 to 2008, but a double digit kind of returns in Indian equities is definitely reasonable to expect.
On the other hand, one should also be careful about the currency because of the current account deficit which doesn’t seem to be going away in a hurry. One should be looking to hedge INR at every appreciation level.
Q: How did you react to the big midcap carnage that we saw last week? Are there any interesting buy ideas from the midcap space after the sell off that we saw?
A: The midcap carnage is a reflection of two things. One is the local liquidity environment for retail public still remains tight and the interest levels remain low. Secondly, the bigger holder of midcaps is beyond retail investors, domestic mutual funds and domestic insurance companies.
They continue to see outflows. That has led to this squeeze finally happening. Thankfully, the stocks we cover, bulk of those didn’t fall or get impacted by this carnage in any significant way. From our coverage universe, we like Bajaj Electrical, Redington and Exide.
Q: Do you think that despite a further deterioration of local macros - any improvement in the global growth situation could compensate for that and take our markets higher in the first half of the year?
A: Our house view also is that the global growth seems to have bottomed out. The trajectory of growth recovery which we see in this year or next year will depend on multiple factors including US fiscal cliff and European political issues. Even in China, we are seeing some sort of a cyclical rebound happening.
The extent of that is still unclear for us, but it has definitely bottomed out with again, just like in India’s case, when we say recovery, we do not expect a recovery to be similar to what we have seen in the last decade. It will still be a muted environment. But even stability and the tail risk being out of the window - that should be supportive of inflows into Indian equity markets.
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