Greek exit will savage appetite for Indian equities

The forex rate of rupee, the monsoon and the government’s ability to push through reforms remain three key factors that will determine the course of the market in days ahead. At the same time, mavens are keenly tracking global economic indicators in the hope of any additional liquidity infusions from developed countries, said Jyoti Vaswani, chief investment officer and director, Fund Management, Aviva India, who manages Rs7,600 crore in assets, in an interview with Sachin P Mampatta. Edited excerpts:

What impact will a Greek exit have on appetite for emerging market equities such as India?
A Greek exit, whether orderly or disorderly, may lead to several events including a significant impact on the banking system in Europe and elsewhere in the world. It is likely to be highly chaotic and the resulting uncertainty will have a negative impact on appetite for emerging market equities.
The exit of Greece could also add trouble on the currency side. With the weakness in the euro and the dollar’s strength, emerging market currencies could be under pressure. Currencies of emerging markets have weakened against the dollar in May ever since the concerns on Greek exit grew. Currency weakness and volatility could further lower the appetite for emerging market assets.

What impact do you expect the weakening currency to have on foreign portfolio flows, going forward?
Weakening currency tends to discourage foreign inflows in the short term. Till the time currency is volatile, foreign institutional investors (FIIs) may remain cautious in the short term. However, whenever the currency stabilises, a weaker level of currency is actually attractive for FIIs to invest. If overall macro environment in India starts improving, FII flows will increase and concerns on currency will subside. FII flows also depend on the risk off or risk on situation globally. Any liquidity injection in the western world either through QE in the US or LTRO (Long Term Refinancing Operation) in the euro zone will increase the risk appetite for riskier assets, including emerging markets like India. This is exactly what we saw in the first quarter of this calendar year when India received a record $8-9 billion as FII flows. The major positive is that in 2011, a year of rising inflation and interest rates and slowing growth, there were marginal FII outflows. So, clearly if the situation improves domestically (improvement in investment environment) and the currency stabilises, FII flows would continue to flow into India. In the long term, FIIs flows have been negative in only one year i.e. 2008 – the year of financial crisis. So, India will continue to remain an attractive investment destination from an FII perspective despite short-term hiccups.

What is your outlook on export-oriented sectors? Could a slowdown in demand from developed market offset currency gains?
Export-oriented sectors have borne the brunt of falling demand, especially from Europe. They will continue to face challenges in the foreseeable future till global growth stabilises. Given the weakness in European economies, currency depreciation may not really help exports as demand outlook continues to remain grim. For financial year 2011-12, Indian exports registered a growth of about 21%. This may come off somewhat this fiscal year. While export destination diversification is already happening for last 2-3 years, Europe still accounts for about 20% of India’s exports. The currency weakness of the rupee provides a near-term respite for exporters, though it may not be sustainable, but certainly provides an opportunity in the current perspective.

Which are the sectors you are negative on?
Some sectors are facing demand slowdown and may underperform in the near term. These include automobiles, cement, real estate and metals. Apart from these, capital goods companies are likely to continue seeing pressure on earnings as capex spending continues to be muted. However, within these sectors, there may be stocks that present buying opportunities at appropriate valuations.

What are the things that you would keep an eye on in days to come?
The election outcome in Greece and the likely renegotiation on the austerity programmes being implemented will be an important event to keep a watch on. The overall direction of global markets will be determined by events unfolding in Europe, which will indicate whether there is some stability and improvement in the euro zone. Measures from the ECB in the form of a rate cut or liquidity injection may provide a trigger to markets. Besides, continued sustenance of growth in the US and a pick-up of growth in China will be important. Market participants have already begun to expect QE3 from the Fed. (The interview was conducted before US Fed chairman Ben Bernanke put paid to all speculation about QE3 for now on Thursday.) Developments in Europe will have a direct bearing on the Fed’s actions, going forward.

Domestically, government action on reviving infrastructure investments and any move to improve fiscal deficit will be important determinants of market direction. Respite on rupee depreciation and global crude prices are also likely to be supportive of the market sentiment. Monsoons will be another critical factor to watch out for as India is still highly dependent on the vagaries of the monsoon. A fall in crude prices could also solve a lot of problems pertaining to fiscal deficit and inflation for India. It will be an important factor to watch out for.

How has the current results season been?
The current results season has been a mixed bag, though the negatives seem to outweigh positives. Sectors such as FMCG (Fast Moving Consumer Goods) and telecom have reported good results while infrastructure, media, capital goods companies have seen some pressure. Banking and IT sectors have reported mixed performance, with some companies doing much better than others. On an overall basis, topline growth across sectors has been healthy, though margin compression has been seen across sectors, leading to muted profit growth.