‘Recovery building; market to touch new highs in FY13’

If the market seems averse to cracking a smile even after positive
surprises such as the Reserve Bank of India’s higher than-expected rate cut, it is only because foreign institutional investors are wearing GAAR-tinted glasses, according to Ravi Gopalakrishnan, executive director and chief investment officer - equity, Pramerica Asset Managers.

Clarity on GAAR and lower interest rates may help turn around
sentiment soon enough, and we could very well touch new highs in the next ten months, he said in an interview with DNA Money’s
Nitin Shrivastava and Sachin P Mampatta.

Pramerica is sponsored by Prudential Financial, which has $900 billion in assets under management across the world.

Edited excerpts:

Q: The market didn’t celebrate too much even after the RBI’s
surprise 50 bps cut, was this already priced in?
A: The market had already priced in a 25-basis point rate cut, but a 50-basis point rate cut came in as a surprise. The initial response from the markets appears to be muted largely due to the lower liquidity from FIIs (foreign institutional investors). The flows from FIIs have dried, given the uncertainties surrounding  GAAR (General Anti Avoidance Rule), which was introduced in the Budget. Once clarity emerges on this issue, flows are likely to resume.

Q: What could the additional liquidity — after the RBI cut — do to inflation in days ahead?
A: Inflation is likely to remain stable in the near term, given the slowdown in the economy and a higher base effect. Oil prices are likely to remain stable with a downward bias, but the Indian rupee has started to weaken, which can neutralise the fall in oil prices. In the event of oil prices going up, it would put a strain on the fiscal deficit which in turn can put upward pressure on inflation.

Q: What are your expectations of the current earnings season? Do you expect to see some positive impact of the interest rate cycle reversal in days ahead?
A: The Q4 earnings are likely to be marginally better than what we saw in Q3. We are expecting net profits to grow by 12-14% in Q4.

Hence, we believe that the earnings downgrade cycle has bottomed out and expect to see earnings upgrades in FY13 on the back of lower commodity prices and lower interest rates from H2 FY13.

Q: Which global factors would you be watching in the medium term?
A: The progress of the resolution to the euro zone crisis, the slow recovery in the economic prospects of the US and oil prices would be the key areas to monitor in the short to medium term.

Q: Are foreign investor inflows expected to be better than the previous year, could GAAR play a spoilsport?
A: FII flows have been very positive since the start of the year. The uncertainty surrounding GAAR, particularly the perceived retrospective taxation, has resulted in a considerable reduction of flows since March. Once clarity emerges around this issue, flows are likely to resume due to attractive valuations (P/E of 14x) of the market, bottoming out of the economy, lower interest rate cycle kicking in, and more importantly, a 15% depreciation in the rupee, which makes India a very attractive investment destination from a foreign investor’s perspective.

Q: Which are the sectors you are bullish on?
A: We are particularly bullish on the financial sector since we see interest rates going down gradually and the macro economic recovery starting to kick in from H2 FY13. Banking and financial services sectors are likely to be one of the biggest beneficiaries of a long-term cyclical economic recovery. We are also positive on capital goods and construction sectors, given the attractive valuations that some of these companies are offering on the back of a likely economic recovery.

Q: Do you see capex picking up in days ahead, what are the factors that may lead to the same?
A: The industry was saddled with a crisis of confidence last year due to high inflation, rising interest rates, policy inaction and global uncertainty. With the Budget targeting a lower and more realistic fiscal deficit target for FY13, policy initiatives from the government with respect to improving the coal availability to power plants, price increases by some of the state electricity boards and increased focus on road construction, in addition to the 50-bps interest rate cut by the RBI, should improve the confidence of the industry and help the capex cycle turn around.

Q: Which are the sectors you would rather avoid currently?
A: We are underweight on sectors such as IT (information technology), energy and consumers where valuations have become quite expensive.

Q: How do you expect the market to play out over the rest of 2013?
A: The market in the near term is likely to remain in a range in the near term until we get some clarity on GAAR and see some tangible signs of a recovery in the economy. We see the market resuming its upward trajectory in H2 of the year and touch new highs in FY13.