Cautious on Indian equities after January rally: HSBC India

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Indian equities gained close to 11% for the month of January, the best monthly gains since September 2010. However, HSBC India is a little cautious on equities after this fairly quick run up because they believe the market is waiting for further cues from policymakers. "The market needs to be bolstered by some fundamental, whether it's monetary easing or some kind of fiscal consolidation measures coming through in the Budget," said Jitendra Sriram, managing director and head of research.

HSBC India's annual India investor conference flags off tomorrow, called Champions of Growth, and is expected to probably be something that global investors will watch very carefully.

Within Asian markets, Sriram says that HSBC is neutral on India, but adds that it is cheap compared to its own history. "Our target on the Sensex is 16,500 for the year, and we expect 14-14.5% growth in earnings for FY13," he said. His strategy for the year is to opt for the growth and defensive appeal, and not chasing high beta names. "We support consumer plays," he added.

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.

Q: What kind of mood do you expect to see at the conference, caution after the big rally of January or more optimism in the momentum that we have discovered?

A: I think there will be a bit of caution because the market has gone up fairly quickly in the first month of the year. It's been led by a complete risk on trade in that regard, so there will be a little bit of caution.

It now needs to be bolstered by some of the fundamental things that people have been waiting, whether it's monetary easing or some kind of fiscal consolidation measures coming through in the Budget. Those positives need to add on to stoke this rally otherwise I suspect that you could see a kind of a pause after a good opening to the new year now.

Q: What have you guys made of this big liquidity interest and does it seem like there is more in terms of money interest that may come into the market?

A: Near term yes, especially given the kind of bond purchases that are happening in Europe. As a house, we forecast a mild recession in Europe for this year and we are little cautious on the US as well. We are slightly below what the consensus expecting, we are targeting somewhere around 1.6% kind of a growth for the US for this year. So overall our mood is slightly cautious.

Investors will need to see some more action coming through now; the first phase is liquidity and the consequent impact. The CRR easing from the RBI has helped in terms of infusing some more liquidity into the market, but later on it has to be followed up by some policy initiatives to ensure that this rally continues from hereon.

Q: Your strategy note for the year says that you are neutral India within Asia. In fact your year end target on the Sensex is 16500. What's leading to that caution and how much and how strong do you think the give back will be through the course of this year for the market?

A: There are two things that make us little cautious on the market. First is this whole aspect of fuel pricing in the Indian economy. There needs to be some action on that given the kind of slippage that we are seeing in the fiscal deficit. Yesterday only there were data points that in the nine months we have hit 92% of our targeted deficit. So clearly there is going to be an overshoot. We are expecting about a 1% overshoot on the fiscal deficit to GDP numbers for this year. So we need to see some action on the fuel under recovery which is there. We need to see some action there.

Overall I think there is a risk to earnings as a result. For FY12, my gut feel is we may see some trimming down on earnings especially in the energy and industrial sectors. Going forward next year, given the kind of fuel under recovery that is there in the system, I suspect that banks because of asset quality issues and energy sector mainly on account of issues relating to fuel under recovery could see some tone down in terms of earnings growth.

We are at this point of time looking at 14-14.5% growth for FY13 over FY12 but there is some scope for a cut back. So as a result of that, I would be a little cautious on the market at this point. We are not in the camp which talks about big melt down from here, but the fact is given the kind of multiples that we are trading in, India is definitely cheap relative to its own trading history. But relative to Asia we are still trading at some kind of a premium.