No major selling seen by FIIs so far; FMCG at risk: HSBC

The Indian market is now a hostage to currency's movement, so the short-term trend will depend on how the rupee behaves, Dhiraj Sachdev SVP & Fund Manager, Equities HSBC Global Asset Management said. But dollar linked sectors with low leveraged balance sheets - like IT, pharmaceuticals will continue to benefit from rupee’s weakness, he told CNBC-TV18 in an interview.

Also read: Rupee breaches 64/dollar; down over 5% in last 6 days
While there are fears that overseas investors will shun Indian markets given the current volatility, Sachdev informs that he has not seen meaningful selling by FII so far. Infact, he feels that there could be FIIs who might use this fall as an opportunity to buy assuming that weakness in currency is an issue with all the emerging markets and there could be some kind of a pullback.
Despite the pessimism on the Dalal Street, he recommends investors with more than two-three years perspective to park funds in equities now.
On specific sectors, FMCG has seen modest earnings growth and valuations are at a premium, so this defensive is at biggest risk right now because risk reward is not in favour. “Any kind of inflationary impact means that going forward even consumer businesses may feel the pinch of higher inflation and lower volume growth,” he explained.
He is not too upbeat on banking sector and sees NPAs becoming an issue of concern for both PSU and private lenders. Below is the edited transcript of Sachdev's interview to CNBC-TV18. Q: You have been hearing a whole host of downgrades that are coming in on India this morning, but how are you positioning yourself in the market at this point, is it a good time to be bottom fishing or is it a good time to be protecting capital?
A: At this point of time, clearly the market is completely correlated to what happened on the currency front. So, the short-term direction of the market will be completely governed by how the rupee behaves. However, when one looks at it, there are still sectors, which are likely to benefit out of the currency, which are dollar linked, which earn revenues in the form or dollars; stocks that are low leveraged in the balance sheet- this includes IT, pharmaceuticals etc besides a very favourable monsoon that some of the sectors will benefit out of it. Hence, it includes agro chemicals or even telecom. Q: What is the risk that while some of these sectors continue to do well, foreign institutional investors (FIIs) may still sell in these sectors because of what they are losing on the currency which is neutralizing or offsetting a lot of the gains or potential gains from these outperforming sectors?
A: A lot has been talked and feared about FII selling, but so far, the selling has not been meaningful. Yes, there is a fear of some of the FIIs who are sitting on the edge and where their stop losses on the currency maybe triggered, but there are still very long-only kind of FIIs who are taking three-five year bets on India and Indian economy or some of these sectors.
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There are short-term FIIs or hedge funds who are vulnerable to this kind of a currency fall. So, we may not really basket all the FIIs in one way, there are FIIs who will take an opportunity to enter even at these currency levels assuming the fact that the fall in currency is a fallout or an issue of the whole of the emerging markets and there could be some kind of a pullback. Hence, some FIIs will take an opportunity to enter even at these levels. Q: How difficult is it for you to convince investors to buy into equities now, the track record for the last six years is bad, right now earnings are probably going to be single digits which is not supportive for equities. Furthermore, interest rates have gone up to 9 percent in the bond market, why should somebody be buying equities at this point?
A: Yes, the environment is extremely difficult to convince any investor to invest in equity. However, historically it is proven that when the sentiment is low and the extreme pessimism is high on the street, that is the best time to invest in equity but somebody obviously has to take a view beyond 2-3 years as well.
When one looks at the alternate asset classes, be it gold or even real estate now, it is becoming vulnerable especially the Mumbai market. So, one has a very limited choice to invest money. Apart from the fixed income yielding instruments or bank fixed deposits which itself are not giving a real return considering the inflation, the alternative is very limited and at this pessimism, if somebody takes more than a three-year kind of a view, it is the time to invest in equities. Q: What about a couple of sectors? I take your point about maybe these defensive sectors might hold out, what about the banking space because now with bond yield surging to 9 percent the treasury income is going to go down quite a bit, what are you advising investors and do you think most of it is in the price or do you expect lower prices?
A: If one looks at banking sector as such, it can be divided into two parts. The public sector banks are currently available at 6-9 percent dividend yields but the problem with them is their very high levels of non-performing assets and restructuring books. The restructuring book camouflages with potential NPAs. So, obviously, while there could be interim relief rallies on public sector undertaking (PSU) banks, it will be short-lived unless they show a meaningful reduction in gross non-performing assets. So, we have to see reduction in NPA levels and the restructured book, which they are indicating for a sustainable rally on the PSU banks.
On the private sector banks, while the valuations are at a premium, they are also vulnerable to indicating a higher non-performing asset (NPA). So, we are somewhat at the margin of getting negative on the private sector banks. We are only tactically playing a relief game on the banking till the interest rate cycle heads down. Q: Between these three sectors which are defensive, IT, fast moving consumer goods (FMCG) as well as pharmaceuticals, where is the biggest risk right now?
A: It would clearly be the FMCG sector because the risk-reward is not in its favour. We have already seen the results which have gone by, show a very modest growth in some of the consumer businesses as well.
It ranges from 8-5 percent to 10-12 percent, so, it is a pretty modest kind of growth and the valuations are at a premium. Hence, any kind of inflationary impact means that going forward, even consumer businesses may feel the pinch of higher inflation and lower volume growth. So at this point of time, FMCG clearly is at risk.