Monday, February 10, 2014
Infrastructure & PSU bank stocks look attractive
By Amit Mudgill Feb 09 2014 , New Delhi
Saibal Ghosh chief investment officer at AEGON Religare Life believes the market will remain slightly under pressure on account of recent tapering effect, muted corporate earnings and election uncertainties. In an interview with Amit Mudgill, he says the market will recover on prospect of reforms by a new government. Excerpts:
It has been seen by many that the rate hike cycle is close to its peak. However, with Urjit committee recommending target CPI at 4 per cent, and RBI dashing market hopes of status quo on policy rate in its recent review (signaling a nod to the recommendations), it seems that the analyst community is too optimistic. What is your view?
It is the beginning of a new era in monetary management in India, as the RBI governor has picked up his mandate directly from the RBI Act 1934, which specifically states that the objective of monetary policy should be to restore the confidence in local currency by keeping inflation down for a long and sustained period of time. Therefore, the committee’s recommendation of bringing down CPI to 8 per cent in 12 months and 6 per cent in 24 months with an emphasis that policy rate should be positive (higher than inflation) till inflation remains above 6 per cent has virtually sealed the rate cut hope in near future. On the contrary, I expect another 25 bps rate hike in the next six months. However, notwithstanding a rate hike one should be realistic to accept that the rate will remain high for a longer period of time.
The oil ministry has announced a massive Rs 15 per litre cut in CNG prices and Rs 5 per litre cut in LPG. It had earlier hiked the cap on subsidised cylinders to 12 from nine. Fiscal deficit has already breached 95 per cent of FY14 target. Can the government achieve its deficit target? How you look at the recent disinvestment drive?
Looking at the approaching general elections these kind of populist measures are anticipated, but are unfortunate from fiscal management standpoint. However, excess money on account of spectrum auction will to some extent offset such fiscal laxity. On the disinvestment front we do not expect that the target will be met, however, higher dividend from PSUs will cover some of this shortfall. Overall, I believe that the finance minister cannot risk a slippage at this stage as it will not only endanger the country’s rating, but will also dilute all the good work that he has done so far on fiscal front.
Broader market has remained subdued amid prevailing concerns over promoters’ pledge, weak balance sheets and poor growth visibilities in many of the midcap and small cap firms. Can we expect more trouble ahead? What should the investors do?
We are in the middle of a negative credit cycle due to low growth and high interest rates for a prolonged period. These two factors still persist and so is the tough credit cycle. My advice to the investors would be to avoid any direct exposure to these kinds of stocks. But if one must, then it is better to invest through professional fund managers who are specialised in investing in small and midcap stocks and reap maximum benefit when the tide turns.
The impact of the US Fed stimulus rollback is easily visible in terms of lower foreign inflows. Can FII investment this year match the numbers of 2013? Will general election boost FII activity in the months to come? How should retail investors play?
I would not like to speculate on the quantum of FII flow this year. But one thing is sure that the emerging markets are not favourite destinations for FIIs at the current juncture. On risk adjusted basis, the developed economies are still more attractive to FIIs. However, if rupee stands out on a sustained basis among the depreciating currencies of other vulnerable emerging economies and a strong coalition comes into power, I am sure India will again be viewed favorably by the FIIs.
The recent data readings in the two largest economies (the US and China) have been weak. Do you think it is a temporary phenomenon? What if the US continues to show weak trend? Can this put a pressure on US Fed to slow down on taper?
The US is on a definite recovery path. However, such recovery is largely based on auto and housing sector performance. Therefore, unless the capital cycle in the US turns around sometime later in this year or early CY15 and growth becomes broad based, the sustainability of the US growth will be a question mark. Though the unemployment rate is coming down and fast approaching the Fed’s target of 6.5 per cent, the labour participating rate is coming down, which is matter of worry. Therefore, I do not think that Fed will be in a big hurry to taper. On China, my understanding is very limited.
What will be the triggers that would rule market in the first half of calendar year? Is there any level in your mind, you think Nifty or Sensex may achieve by December-end or March-end of 2015?
I believe that in the near term, the market will remain slightly under pressure on account of recent tapering effect, supply of PSU stocks as per government’s disinvestment programme, muted corporate earnings and election uncertainties. However, the market may turn positive on the prospect of reforms by the new government provided rupee remains resilient as it has been in recent past.
What earnings growth you expect for Sensex or Nifty firms for FY14 and FY15? How the frontline firms fared so far? Which firms/sectors will drive Sensex earnings? Which sectors are you bullish on?
The earning season so far has been broadly towing the expected line. We expect an earnings growth of around 8 per cent to 10 per cent in FY15 for Nifty50 stocks. On specific sectors, till the time we see some definite sign of investment cycle recovery and the tapering concern exists I would like to be overweight on IT and pharma. Auto and private banks will also form an integral part of our portfolio. Some of the beaten down deep cyclical stocks in infrastructure and PSU bank space are also looking interesting at the current juncture.
Any advice would you like to give to investors?
Notwithstanding the short term challenges have faith in India growth story and stay invested.