Which sectors is HSBC Global AMC betting on?

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HSBC Global AMC has a 12-month Sensex target of 18,000, Arjuna Mahendran, its Managing Director and Head of Investment Strategy Asia, told CNBC-TV18 in an exclusive interview. He does not rule out a dip before that.

Mahendran lists inflation and India's large budget deficit as concerns. He expects the Reserve Bank to hike rates further. "The market is closely watching out for RBI's next action."

Sector picks:
Mahendran advises investors to look at sectors that are focused on domestic growth. "It will be a challenging time for companies reliant on revenue from overseas. The financial institutions and other engineering and conglomerate focused on infrastructure would be my picks in the year ahead."

Here is a verbatim transcript of the exclusive interview with Arjuna Mahendran on CNBC-TV18. Also watch the accompanying video.

Q: What have you set out as your 12-month target for the Sensex? How are you playing this sectorally?

A: Broadly speaking from perspective of fund manager sitting outside India, the Indian market looks reasonably interesting. Our target is about 18,000 for Sensex on 12-month basis, and there could be a dip before that.

From sectoral perspective, I would look at sectors that are more focused on domestic economy. Exports are slowing down with slowdown in global economy in second half of year and this means that the companies that are over reliant on revenue growth from overseas and profit growth from overseas will find it a more challenging environment. Therefore, I would prefer companies that are more domestically focused, which can generate more sustainable growth from local sources. That would mean consumer oriented sectors in the local market.

Q: What about the interest rate senitives, things like real estate, banking, even infrastructure? How would you position yourself on those sectors now?

A: I think property sector is what stands out in Asia right now because I think affordability is quite good. Looking at countries as diverse as Hong Kong, Korea, even Japan and I think India falls in that camp where the affordability in the middle class housing segment looks very good and the demand for commercial real estate is also extremely strong. So that would be the most exciting theme, going forward.

The problem in India is that the property sector is not adequately presented in the stock market. We don't have very large liquid property oriented companies listed on the stock exchanges through which investors can participate in that growth. So until those companies emerge, we will have to participate directly or through private equity and other types of indirect vehicles in the property sector. So, that really leaves the banks and the financial institutions as a proxy for property companies and the property development theme in general. So I would play through Indian banks.

Having said that, Indian banks are not cheap. On a price earnings basis, Indian Banks are anything upwards of 2.5 times to as much as 3.5 times their earnings, which suggest that they are not cheap. And looking forward the upside in financial sector segment could be capped. So, that then leaves us with a very few choices in domestic market.

I think I would look at some of the infrastructure plays because I feel that the opportunities for India to really move ahead fast on infrastructure are probably the most exciting opportunities there are. And the financial institutions and other engineering and conglomerate focused on infrastructure would be my picks in the year ahead.