Indian market attractive; bet on private banks: Amundi

As global markets continue to deal with its woes, Ayaz Ebrahim of Amundi believes the European situation, the US fiscal cliff and issues in China continue to be a concern. He also does not expect a resolution for the fiscal cliff until January. However, Ebrahim is hopeful about the Chinese economy and feels its growth numbers including the PMI data look good and refer to a stabilized economy.

Also read: Market may see new highs next year: Raamdeo Agrawal Ebrahim further added that Asian markets are trading at 15 to 20 percent below their usual averages and India at present is trading at 14x multiples against a long term average of 18x. Moreover, India trading below its historical averages looks attractive, he opined. India's earnings growth is also expected to be higher in FY14 as the initiatives announced by the government have been taken positively, explained Ebrahim. But, Ebrahim feels reform execution remains a key determinant for the market. Currently, he is overweight on the private sector banks and consumer durables.   Here is the edited transcript of the interview on CNBC-TV18. Q: What's the general global risk environment looking like right now for the next few weeks? A: Over the next few weeks which is the short-term, obviously there are a few things that are still on people's mind. There are three things that are influencing equity markets at the moment. One is the European situation, secondly, something that we will know well by early January is the US fiscal cliff and third is the issues in China that have specific implications for the Asian region and to a certain extent the global market as well. If we look at all these three things put together, the tail-risk event of any possible severe financial crisis through the actions of the ECB, is certainly decelerating by the day. I think the growth in Europe is still fairly anemic but, that is another issue and we can say that is largely in prices. The negotiations for the US fiscal cliff are still going on and we do not expect any resolution before January. But, the general base case scenario is that we do expect the resolution to be reached. But, markets could remain volatile over the next few weeks, until there is a resolution to that. Thirdly in case of China, the latest numbers coming out suggest that the economy has stabilized and suddenly the latest PMI numbers that just came out took it over 50. Therefore, we believe that China has stabilized and we might actually see a better growth rate in China into 2013. That will be favourable for the equity markets. We put all that together and we are just looking at a few weeks and the US fiscal cliff issue will keep markets volatile. However, if you look at over a six month period, assuming the fiscal cliff resolution is reached, China is growing decently. The European anemic growth is already priced in and we remain quite positive on a cautiously optimistic note that markets will gradually trend up as we have seen this year. Q: How has all this translated into how flows are approaching the end of the year because India for example, has seen only about half of the funds it saw in October-November, are people freezing up because of all these concerns or are they expecting a December rally? A: I think vis-à-vis India, we saw a fair amount of FII flows previously, ballpark it was USD 18 billion or so. We have seen a fair amount of money being allocated to India already. To a certain extent money that has been allocated to equity markets may remain a little bit more flat till the rest of the year as people wait for new allocations to be made early next year and to see what happens with the US negotiations as well. However, given where valuations are today, we are actually quite constructive on the equity space, especially in the Asian region. If you look at valuations in general, Asia is trading about 15-20 percent below its long-term average and it is only three times since early 1990’s when Asia has traded below where we are today by a significant way. One was the Asian financial crisis, second was the global financial crisis in 2008 and third was the rough time around 9/11. Unless we get another extreme event, the risk of those extreme events are becoming less and especially on the European side, valuations are very much on the cheaper side. Even if we look at India, India is trading at 14 times multiples over 12 months. Its long-term historical average is 18 times. There have been worries about the macro situation and so on but, certainly the government has made some very bold initiatives. We still need to see execution. But, India is also very much trading at its lower side and I believe that money will gradually flow in here over the next six months plus. _PAGEBREAK_ Q: What is your tactical position in the India portfolio now, because your big bets have been in the past financials and consumers? Have you changed allocations around given recent performance in these two clusters? A: We remain overweight on the consumer side but from a bottom-up stand point. There are number of consumer stocks out there, which we could say are expensive but there are a whole host of them that are on the cheaper side. When investing, one really has to be very conscious of valuations. Conceptually, stories may sound good and we talk about the big domestic consumption story and so on, but every stock has its price. However, we remain overweight and we believe we have a good portfolio of cheaper consumer plays and we are overweight there. We are selectively overweight financials.  At the moment, we are more overweight on the private sector financials than the Public Sector Undertaking (PSU). However, the PSUs are looking very much on the cheaper side and I wouldn’t be surprised that gradually over a period of time we may look at that and add to those positions. Other area that we like is the pharma area which is consumer related as well but there are some interesting bottom-up stock picks there. We are not overweight the property sector. It is very much company linked and stock specific linked as opposed to the sector. There has been some very good value there, and we certainly like certain stocks in that area as well. Q: Local opinion seem to be tilting towards the theory that this was the makings or the base of a big bull market move that would start next year – would you go with that or do you think we are set-up for another grinding kind of year where they will be returns but there won’t be any clean euphoria or clean trend for markets? A: Our own belief is that world needs to adjust its view of equity markets over the next few years. The reason why I say that is that, growth globally is going to be on the slower side over the next few years.  Largely because Europe is anaemic, US we expect maybe 2.5 percent growth next year and maybe gradually accelerating from there but certainly not very strong growth. These two regions are still important from an export stand point and the domestic consumption in these areas are still quite significant for companies in this part of the world, lesser so for India than other parts of Asia. Globally interest rates are very low. Therefore, if you are grinding out returns of about 10-12 percent a year, which is what we are seeing right now, is not a bad return in global and Asian markets. We believe that is what is going to happen in equity markets in general over the next few years, i.e, it is going to follow earnings growth. We don’t expect a significant PE rerating in the environment that we are in. If we follow earnings growth, one should hopefully be getting low double digit return of around 10-11 percent for the Asian region as well as India. India’s earnings growth is actually higher. Over the next 12 months we are looking at a ballpark of 15-16 percent. I think that the local indices should track those sort of returns. We certainly don’t expect a strong bull market of 30-35 percent returns. That would be unhealthy in the environment we are in. I think valuations could become a bit more stretched; it could lead to more volatility in equity markets. A steady rise of 15 percent odd is realistic and would keep valuations on the cheaper side which will give a good floor in terms of equity markets as well. Q: How important a role would politics play in determining Indian stock market returns over the next 12 months; both in terms of continuing news flow on policy issues from New Delhi and running into a possibly a general election in 12 months time? A: Firstly, the initiatives announced by the government over the last few months have been taken very positively and should be taken very positively. The next important step is to see that these policy announcements actually are followed through in terms of execution and that is what markets would be looking for. If markets are viewing that these things aren’t going to be implemented and so on, that would be disappointing for markets and they could come off on the back of that. However, if those are being executed in a timely manner, it could be very positive for equity markets and we could see a positive impetus as a result on that. Vis-à-vis the elections, market generally does not like uncertainty. So, depending on what the expectations are closer to election time, it could influence market. Market likes a sense of predictability to a certain extent. The less predictable the elections are, the more volatile the market will be in the run up to the elections. Q: Are you disappointed with the way IT has turned out this year? You have trimmed exposure but it is still a fair chunk in your portfolio? A: Given what is happening globally, and the IT story, in terms of IT investments has certainly been impacted to a certain extent. Selectively some companies have done better than the others. If I go back to what I mentioned earlier on is that some of the stocks within the IT sector have been sold down to a fair extent. But again if we focus on valuations, every stock has its price. If we do believe that the US is going to gradually pick up and on the back of that if the corporate balance sheets are quite strong, then generally speaking on a global level with a few exceptions, there is cash to invest. Once business confidence starts returning, we do believe that this sector will pick up again quite well. The positioning we have taken is on the back of that. I wouldn't be surprised overtime again that we would increase positioning over here, over a period of time and not right away.