Mkt volatility here to stay; overweight on IT, energy
Tushar Pradhan expects to see some stability in equity markets once the battered rupee begins to settle at reasonable levels, but cautions that the current market volatility is here to stay.
October 01, 2013 / 17:03 IST
Harsha Jethmalani
moneycontrol.com
Market valuations are attractive and can lead to positive time correction, believes Tushar Pradhan, CIO of HSBC AMC. In an interview with moneycontrol.com he said, "Over the last few weeks, significant bipolarity in terms of valuations is correcting to levels where stocks should be trading as a whole. What we see now is a correction to more reasonable levels and I don’t think there is a crisis in the markets."He expects to see some stability in equity markets once the battered rupee begins to settle at reasonable levels, but cautions that the current market volatility is here to stay. Further, the fear of the foreing funds exiting Indian market once taper talk resume in the future, shall remain, he added.In the current scenario, he recommends investors to opt for systematic investments and buying on dips. Pradhan is not too gung-ho on banks from the near-term perspective because he feels that asset quality is not likely to improve soon. But added that current valuations look attractive from long-term perspective.The fund house is betting on companies which are not exposed to very large regulatory changes and are less indebted. It is overweight on information technology services and energy.Also Read: ETFs need to be handled with careBelow is the edited transcript of Pradhan’s interview Q: The global liquidity party triggered by Fed’s decision for EMs seems to be over; do you see the reversal of this bear market anytime soon? Or would you say we should be prepared for more downside? A: On back of reform measures suggested earlier this year, there was a sentiment in the market that equity markets would touch new highs. However, we didn’t share that unqualified optimism at that point. The economy was showing signs of fatigue and there wasn't adequate reason for industry to get excited. We had issues related to power and infrastructure, issues on the fiscal front with no credible line of sight on how the numbers would be achieved, those related to delays in getting approval for FDI investments and so on. These were significant stumbling blocks and as the year progressed, there seemed to be no concerted effort to correct the situation.In fact, it got more complicated because certain global events unfolded - especially the news emanating out of the US Federal Reserve on a possible tapering of the Quantative Easing (QE) and upheaval in Syria. When we saw the Sensex treading within the band of 19000 to 20000, the movements were not broad based.It is currently a two tier market. There are a handful of stocks which are very expensive and there is other large group of stocks trading at considerably cheap valuations. The markets were being held up by a handful of expensive stocks, but now the expensive stocks also seem to have started to crack. This is because, beyond a point, you cannot feel safe buying these stocks by paying very high valuations of 30-40 times forward earnings at a time when it appears that earnings growth is likely to come down significantly for these companies. Hence, over the last few weeks, the significant bipolarity in terms of valuations is correcting to levels where they should be trading as a whole. So what we see now is a correction to more reasonable levels and I don’t think there is a crisis in the markets.Q: Most market experts don’t see the Nifty hitting new high this year. Do you fall in the same camp? Would you suggest investors to sit on the fence now or would you advise buying the dips?A: Macros currently seem to be weak because there's a perceptible lack of confidence. Let’s look at the three components that contribute towards GDP growth, i.e. Private Investments, Government Spending and Domestic consumption, private investments have been nearly zero. Government spending has the ability to support GDP growth but with this year being the last year for current government’s term; it doesn’t seem to be able to initiate any significant momentum. Moreover, consumption growth which forms a large part and has been a key component supporting GDP and that has come off. It’s not as if the consumption theme is under pressure, but just that the high growth is difficult to sustain over a long period of time. However, making systematic investments and buying at dips should help investors in averaging their cost.Q: FIIs have invested over Rs 11,000 crore (USD 1.7 billion) in our market this month. Last month they withdrew nearly Rs 16,000 crore. Would you say India is now back in favour? How high is the risk of FIIs exiting India once taper terror resumes in December?A: Indian markets find themselves in a tricky situation where the only meaningful participants in the Market seem to be the FIIs. Currently FIIs, who strategically have holdings of nearly USD 400 billion are tactically shifting their portfolio. This marginal net selling is causing some correction in the markets. It is critical for us to have a counterbalancing mechanism through domestic institutional investors as well as by increasing retail participation, without which such moves may cause undue volatility. If the currency situation improves, equity markets should follow suit, but markets could remain volatile over the near term. The market valuations are attractive and can lead to positive time correction, however, the risk of FIIs exiting from India due to QE tapering shall exist._PAGEBREAK_Q: Rupee has been one of the world’s worst performing currency. We are still hugely current account deficit and no material long-term steps have been announced so far to fix the problem. Do you see the rupee hitting 70/USD as we head to elections? Or is that possibility completely off the table now?A: The start of the sharp drop in the exchange rate vis-à-vis the US dollar started right after the comments by the Fed Reserve Chairman in May. This was not only restricted to India but ran across most emerging markets as the import of the comments made it clear that the world will have to deal with lesser levels of liquidity especially emanating from the US in particular. However the domestic situation in India with a large current account deficit compounded the woes. After major announcements and efforts from the RBI In recent weeks the currency has seen a smart reversal. However it still remains to be seen if the stability in the currency will settle anytime soon. This is due to the fact that the Fed taper has been deferred, not cancelled, and we continue to remain a largely importing nation depending on remittances and foreign direct and portfolio inflows to fund our CAD. We expect more volatility in the interim.Q: Banks have been hammered on concerns over funding costs and asset quality. Do see more pain in store for banks or you think the current prices offer a good bargain?A: Asset quality is not likely to improve in the near future and hence valuations may not rebound on the back of this factor improving. You have to separate the market movements from fundamentals in the short term. Hence we feel that while the market is offering a discount to valuations in the banking sector, the same may lessen as the trend toward stability is evident, even without actual numbers improving. We view the current valuations as attractive from a much longer term perspective as we feel the pain in the interim may be conducive to look at some other opportunities in the meantime.Q: Which sectors do you think to be attractively valued at current levels? Which sectors are you overweight on and which ones are you avoiding?A: We like companies which are not exposed to very large regulatory changes are less indebted and have inherent demand irrespective of where the economy goes - there are plenty of such companies and are now available at relatively better valuations because of the sharp correction. At the moment we are slightly overweight on information technology services not only because of the benefits these companies would derive from weaker rupee but also because of higher revenue growth due to improving US economy that is likely to aid discretionary IT spends. We are also overweight on energy as we believe that the government seems open to oil price deregulation in the sector and even though globally the oil prices remain stubborn the trend overall seems to be on a downward trajectory. Q: Fitch recently slashed India’s growth forecast to 4.8% for FY'14. Will the nightmare of a credit downgrade become a reality soon?A: We are definitely undergoing the turbulent times but growth can be back on track if policy makers take right decisions on long term development. The government does take the possibility of a downgrade very seriously as it does have immense consequences on the Indian economy if it were to happen. We are sure the government will take all steps necessary to ensure that this does not transpire and hence view a sovereign downgrade a lower probability events as of now. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
