FMCG expensive; pharma a better bet: Blackrock's Nagnath

S Naganath of DSP Black Rock Investment Managers expects the Reserve Bank of India (RBI) to cut rates in its January policy and not before that. The central bank is likely to hold rates in its next policy meeting in December and may go for a cut in key policy rates in the first quarter of next calendar year. According to Naganath, rates cut in the first half of next year will be a positive trigger for our market.  Going forward, he says, reforms will determine GDP rate and market movement.

On the positive front, India Inc may not be fully out of the woods, but a significant number of companies have beaten analysts' estimates this earnings season. Commenting on his reading of specific sectors, Naganath says, he is positive on IT sector in the medium to long-term. "As and when the fiscal cliff issue on the US is resolved, which I think will happen in the course of the next month or so, then, as US economy begins to gather momentum, you will see more business flow into the technology sector," he feels.
He expects FY14 earnings to pick up by 14-15%. He is positive on pharma and the two-wheeler space, but sees headwinds for the textiles sector in the near-term.  
"FMCG possibly is a little on the expensive side. It has done very well in the last year or so but looking ahead, I would say that perhaps the uptrend will probably be a more moderated. On the other hand, pharmaceuticals as a sector, I think if you go back 5-10 years has done very well consistently over that time period. Now expect that to continue over the next 5-10 years. So relative to FMCG, I think pharmaceutical still looks more interesting," he told CNBC-TV18 in an interview.
From the global perspective, all eyes will be on the US, where the Congress will discuss President Obama’s proposed new stimulus package. The eurozone will also continue to be in the spotlight amid the ongoing political bickering over the Greek bailout.
Naganath expects a rally post the resolution of the "fiscal cliff" issue. But he expects the weakness in US equities to continue for another month of so.

Below is an edited transcript of S Naganath's interview on CNBC-TV18.

Q: A word on all the fears around the fiscal cliff. What do you think we are leading ourselves up to; a period of protracted uncertainty and more volatility? Do you think it is a big decider for markets?
A: Certainly it is reflected in the weakness in US equities over the last 3 or 4 trading sessions. That trend is likely to continue for the next month as discussions continue on how to avert the fiscal cliff and in terms of higher taxes and spending cuts.  There is a probability by the middle of December to see some resolution on this issue. Q: Is there any domestic trigger that could take the markets out of their slumber in the next three to six months?
A: First of all there is likely to be rate cut sometime in the first quarter, possibly January-February once inflation begins to moderate. It is a positive trigger for the markets to go up. Second, even though the fiscal cliff will be an issue to contend with and is likely to cause weakness in global equities over the next four weeks, it will be resolved by mid-December. Once the issue is resolved, you will see a rally in global equities included in emerging markets and India. Q: Are you looking at a sizeable performance? Are you expecting a September-like performance for the market? When it trickles down to emerging markets it is not going to be that big, is it just a worry that is out of the way?
A: It depends on the extent of weakness in equities. In the next four weeks if global equities decline 5-10 percent, the rebound, once the issue is resolved with regard to the fiscal cliff will be much stronger. Additionally, here we had some reforms in September. We expect more to follow, especially if there are more efforts in getting the investment spending cycle pick up momentum that will be warmly welcomed by the market. Q: What are you bidding for in December from the Reserve Bank, no action or do you think there is going to be some good news from them?
A: Any likely rate cut will happen only in the first quarter, so I do not expect any rate cut in December. Q: Everyone has been talking about the liquor stocks and how they have thanked upon the pun unintended this time around. Are you looking at some of these newer spaces, the new midcap ideas like liquor, media?
A: In any diversified equity portfolio you look at different sectors and stocks within those sectors, whether it will be largecaps or midcaps. So that is a dynamic process and continues as you manage diversified portfolios. Q: How are you feeling about individual stock performances? The earnings season has not been special even if there is no reason for downgrades. Are you confident that there is a reason for looking at an upgrade anytime soon?
A: Many analysts and portfolio managers are looking ahead to fiscal 2014, while fiscal 2013 in general is expected to come up with10-11 percent in terms of corporate earnings growth. Fiscal 2014 i.e. April 2013 to March 2014 is the year where we expect earnings growth to pick up more towards 14-15 percent mark on the back of a gross domestic product (GDP) growth rate.
We expect it to be in the range of 6.5-7 percent. This is because we do expect the investment spending cycle to pick up next year and add 1 percent to GDP and if indeed GDP is 6.5-7 percent. 14-15 percent growth rate in corporate earnings is not unrealistic. So, focus is turning towards fiscal 2014 and if we do get 14-15 percent rate of growth in corporate earnings, it will underpin reasonably strong performance by equities. Q: As we start 2013 and enter into an easy monetary policy environment, would it be prudent to lap up on some of these rate sensitive names? Within the sectors which pockets would you like?
A: As interest rates begin to decline, banking and financials will continue to remain one sector that will certainly be focused by portfolio managers to a lesser extent possibly than the real estate sector. But, an important area that needs to be focused upon is the capital goods engineering infrastructure area which has been on the backburner as far as portfolios are concerned, many are underweight in it. It will be back in focus in fiscal 2014 and beyond, when the investment cycle begins to pick up steam. Q: What about IT, how do you approach that? We just heard from NASSCOM, they believe the industry will grow 11 percent to the lower end of the range that they had guided, how would you approach the sector?
A: The industry may face a bit of headwinds in the near-term but I am very optimistic about the prospects for the technology sector on the medium-term to long-term. This is because on the one hand you have the better fit from currency depreciation. But when the fiscal cliff issue on the US is resolved which will happen next month or so, then as the US economy begins to gather momentum, you will see more business flow in the technology sector. So, if you take a medium-term to long-term view, might be optimistic about the technology sector. Q: How do you approach sectors like the FMCG bunch, pharmaceuticals where the numbers have been strong but the stocks are so expensive, is that still the space to bet on despite the valuations?
A: FMCG possibly is a little on the expensive side. It has done very well in the last year but looking ahead, the uptrend will probably be more moderated. On the other hand, pharmaceuticals has done consistently well over the past 5-10 years. Now expect that to continue over the next 5-10 years. So relative to FMCG, pharmaceutical still looks more interesting.

Q: After this festive season there is some expectation that the entire auto sector is seeing a turnaround and perhaps the worst is over in terms of sales. Do you think incrementally it is a good idea to put more money in the auto sector or would you just be on hold?
A: Again I will defer from company to company but in general we are more optimistic on the four-wheeler segment of autos as opposed to the two-wheeler segment. Q: How to play this from a fund perspective because the problem is that the local guys have just not been in the market if you want to get in now, what is the good way to do it, go with the vanilla index fund, pick up one of these sectoral funds? How would you recommend playing it?
A: This is a matter of analysis and risk appetite. First of all the investor has to identify what sort of return expectations are realistic relative to other avenues for investment. The risk appetite the investor has and then make the allocation to equities, out of his overall portfolio. Within that whether to buy a diversified fund or a sector fund or a thematic fund is more a function of analysis of various funds at that point in time. Q: Bharti is the biggest gainer today, what have you made of all the newsflow around the telecom space and is that a space that you would bet on?
A: Based on the price action that we see in some of these stocks, the sector certainly looks interesting. Though, there has been a bit of underperformance by the sector in the past few months, based on today’s price action it might appear that the prospects of the medium-term to long-term still looks interesting for the sector. Q: We have talked about a couple of cues like what is happening across the globe and of course what happens with the RBI as well. How important will politics be in the next year? Do you think that may turn out to be the make or break just for our market?
A: No, the reforms announced in September were very encouraging. If we do see some follow-up reforms specifically with regard to increased speed on project implementation, that whole upturn in the investment cycle will add significantly to the overall growth momentum and that is very important. We will see reforms in that regard and you will find GDP growth rate getting closer to the 7 percent mark for fiscal 2014, which will be very positive both for sentiment and for equities in general. Q: You mentioned that the weakness in the US equity markets could continue for a bit. As we head into the fiscal cliff event, do you think our markets could move lower? Or could it be perversely a better thing for a market like India, given the fact that funds could be routed into markets like us?
A: First of all, the fiscal cliff issue will continue for about a month. According to me the issue will be resolved by mid-December. During that time if the US equities continue to weaken further as they have in the last three-four trading sessions it will effect global equity sentiment. So, our equity markets will also be witnessed to weaker sentiment as a result of what happens to equities in the US, in Europe and elsewhere.
Once the issue is resolved with regard to the fiscal cliff, you will see a nice rally towards to end of the year which again will benefit all equity markets globally. Q: So at the end of the day, are you feeling any more confident about the fabric of this market in terms more sustainable uptrends? Do you think it is the same, grinding up, volatile, stop-start kind of move for next year as well?
A: It might appear that way for another month or two.As we get into calendar 2013 and more importantly into fiscal 2014, I am very optimistic that this market will head higher on the back of stronger GDP growth, stronger corporate earnings and an uptick in the investment spending cycle.