‘Euro crisis won’t quite singe India’

The European situation could continue to haunt world economies for a while, believes Bhanu Katoch, chief executive officer of JM Financial Mutual Fund, which has over Rs6,400 crore of assets under management. He anticipates that growth could remain slow in the region for years, even decades. Barring a few export-oriented sectors, the Indian economy may remain insulated, he told DNA. Long-term investors could look at entering equity markets through systematic investment plans. Fixed maturity plans look attractive on the debt side, he said. Edited excerpts:

Markets continue to trade at levels of around 5150-5200 despite significant correction in the global markets. Do you see markets holding on to these levels?
Markets have been lacklustre for most part of 2011 and volumes have been declining continuously. This has resulted in moves on either side getting accentuated.

The current market rebound has been on low volumes and may not sustain. The economy is showing signs of a slowdown, the prevailing political situation and fiscal deficit situation continue to be challenging. For a sustained rally, the economy needs to improve and international inflows should go up. We may not be out of the woods as yet but the market may have discounted most of these negatives. Sensex is currently trading at 14.5 times fiscal 2012 earnings, which is not expensive from a historic perspective unless macro-economic conditions lead to a further downgrade in earnings estimates. Also, we are at the end of the rate tightening cycle by RBI, the reversal of which will give the economy and the industry the required impetus over the next few years. 

Do you see a resolution to the European crisis anytime soon?
The most challenging global event right now appears to be the situation in Europe. It is a fairly complex situation where several small economies with enormous debt need to be bailed out by relatively stable economies to keep the monetary union intact. The situation in Greece and Italy looks fairly problematic. Our view is that there is no short-term solution to this problem as the debt to GDP ratios of most of these economies are very high.

What about the European Financial Stability Facility? Do you see room for expansion there?
Though the European Financial Stability Facility (EFSF) created to bailout the problem countries seem like a logical step at the moment, EFSF expansion not only threatens France’s triple-A credit rating but also ultimately Germany’s. So, there has to be serious effort to reduce expenditure and correct years of fiscal mismanagement. In short, problems in Europe may remain a hanging sword on world economy. We are looking at years or may be decades of slow growth from this region, which will eventually have its impact on exports of emerging markets in the short to medium term. Heightened global risk awareness is already taking a toll on emerging market currencies.

How badly could this slowdown impact India?
Other than a few exporting sectors, the Indian economy to a large extent remains insulated from the global situation. Consumption remains a central theme with the steady rise in per capita income. The Indian economy will grow at 6 to 7% with all the challenges. The corporate sector is more integrated with the rest of the world in terms of global presence and exports, which will have an impact on their growth.

Will markets prefer domestic themes?
Well-entrenched domestic themes, along with rate sensitives will do well going forward. Markets are likely to increasingly become stock specific as a challenging macro environment will clearly differentiate market strategy and management capabilities of the corporates.

What are your views regarding inflation that continues to run at high levels?
Inflation is expected to cool off over the next few months as a result of a good monsoon and a high base effect of last year. Consequently, interest rates are also expected to come down, leading to an upturn in the capex cycle over the next two years.

Which sectors are you overweight on in the short term?
In the short term, information technology (IT) may do well due to stable demand, currency depreciation benefits, cash-rich balance sheets and reasonable valuations. Auto may also outperform due to strong growth, robust rural demand, and reasonable valuations. Cement could perform due to capacity additions slowing down, demand-supply improving and strong pricing power. Sectors which will have more headwinds in the short term are consumers as they are trading at high valuations, oil & gas (PSUs) due to huge subsidy burden and PSU banks for concerns on their asset quality. Having a sectoral view is a good thing, but one needs to be more stock specific to succeed in this market.

With RBI indicating that it may pause the interest rate hike cycle, what’s your outlook for debt products? Among debt products, which categories look attractive?
We believe that the interest rate cycle may peak out in the near term and therefore offer good investment opportunity for investors having a medium to long term investment horizon (6-12 months) in duration funds.

We believe that those investors who want to lock into yields for a fixed investment horizon should invest into fixed maturity plans. Investors who have an appetite for some volatility and an investment horizon of minimum six months should lock into short-term, gilt and income funds. Investments are currently available at attractive current yields. Moving ahead as the interest rate cycle changes, investors could stand to benefit on account of current yield as well as capital appreciation, translating into superior total returns as there is an inverse correlation between price and yields.