For the indices to go up from here, the economic cycle has to turn’ ANAND KALYANARAMAN The bigger questions are — how the US economy will perform post tapering and how high the US interest rates might go. These outcomes will have a bearing on the capital flows to emerging markets such as India. With the benchmark equity indices near earlier peaks, what should investors do?Lakshmikanth Reddy, Executive Vice-President and Head — Equity, ICICI Prudential Life Insurance Company Ltd, shares his views with Business Line. Edited excerpts of an interview: The equity market is close to its all-time highs despite economic challenges. Is the optimism overdone, or are valuations still attractive? The market has been in a narrow band of +/- 10 per cent for quite some time and now it’s at the top end of that band. The current market valuation indicates greater optimism in stocks in export sectors and those with global operations than the domestic cyclical or consumer sectors. IT services and Pharma companies have got re-rated whereas banks and capital goods got derated. The consumer sector is facing demand headwinds. As such, the aggregate market valuation is in line with historical ranges and cannot be said to be excessive. For the benchmarks to go up from here, the domestic economic cycle has to turn. The US Fed postponing the taper provided the market a breather. As and when the tapering starts, what will be the impact? As and when the US Fed announces its intention to reduce its asset purchases, the event will not come as a complete surprise to the market as it did the last time. The bigger questions are — how will the US economy perform post-tapering and how high would the US interest rates go. These outcomes will have a bearing on the capital flows to emerging markets such as India. There is considerable uncertainty over this, as there is no historical precedent, and it is possible that the market may remain volatile through the phase of tapering as well as in its immediate aftermath. Should investors stick with the large-cap stocks which have done well, or is it time to look at mid- and small-caps? Which sectors or stocks are you bullish on? Whether one should stick to liquid large names or illiquid mid-cap names is a function of the investment horizon as well as the view one has on the economic cycle. A lot of mid-sized firms in India are in commoditised businesses or low-end manufacturing and thus are getting squeezed in this downturn where the manufacturing sector is doing very poorly. However, as the cycle turns, some of the better managed companies among the mid-sized firms will do exceptionally well in terms of returns. We are bullish on select stocks in capital goods, logistics and agri-related sectors in the mid-cap segment. Many private sector banks are doing well despite the weak economy. But many public sector bank stocks are available for less than book value. Is it a buying opportunity? On the financial sector as a whole, the troubles are yet to recede, but given a valuation level which discounts a few more years of sub-par profitability, one should be looking to invest. However, for a given bank to be investment-worthy at depressed valuation, it has to have enough capital to survive the downturn and bad asset write-offs. We hold a cautious view on public sector bank stocks despite low valuations because we fear many of these banks will be in severe need of capital, and raising capital at current valuations further depresses their ratios. It is better to stick to well-capitalised banks, which have limited risk of dilution in a downturn. What about beaten down infrastructure stocks? Is it a good time to buy? A lot of infrastructure companies have built up an asset base which is yielding weak or no returns, and the situation is unlikely to improve any time soon. In the infrastructure space, we find compelling value in State-owned utilities, in generation as well as transmission, which are both cheap and have limited debt-related concerns. What is your outlook on the rupee? Is the worst over or could it again revisit the lows of August? From a short-term perspective, the Indian rupee has found its support on the back of some fundamental improvements, such as export pick-up as well as some unsustainable short-term interventions. However, to conclude that the worst is over, the inflation rate has to come off sharply from the current high level. Inflation is after all, looked at differently, the rate at which the currency is losing its value internally. If a currency is losing internal value, its external value will eventually go down. (This article was published on November 18, 2013)
Posted on: Tue, 19 Nov 2013 01:55:17 +0000
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