Risk-reward equation in rate-sensitive sectors is getting attractive

Sonam Udasi, head of research at IDBI Capital Market Services, believes that though recent sessions have seen some resilience from the markets, we are still dictated by global factors. He tells DNA that valuations are looking sufficiently interesting in some of the interest rate sensitive sectors to justify buying. Edited excerpts:

The markets have been resilient over the past few sessions. What explains the change in sentiment?
Resilience cannot be judged on the basis of a few sessions. After the sell off in August, global equity markets seem to be in a relief rally stage. India performance is also reflecting this. However, this trend can easily reverse as global risk appetite is fragile at this juncture.

How do you view the passing of the Land Acquisition Bill? Is it a positive as a sign of traction in reforms?
The Bill is likely to enhance transparency and remove limbo prevailing on development over the long term. So in that sense it’s a positive. However, it also would raise costs of development, which is not such happy news.

Which are the sectors that you would be watching for some value buying?
We would look at interest rate sensitive sectors such as banking, especially PSUs (public sector undertaking), and autos which have corrected significantly from peaks. While concerns on growth and NPA (non-performing asset) management still remain, the risk-reward equation is becoming attractive considering past long-term growth trends in these sectors.

Which sectors would you rather avoid?
The realty and construction space have emerged as top-of-the-mind sectors to avoid.

What are the major factors that would influence the market for the next quarter?
Global economic situation and policy response are likely to guide equity investors globally. For India, the Reserve Bank of India’s (RBI’s) upcoming policy would be keenly watched. Any move on a third round of quantitative easing (QE3) by the US would make the RBI’s task of managing inflation even more difficult than it already is.

How does Angela Merkel’s electoral failure affect the future of German assistance to the European Union?
For now the German courts ruling (upholding German bailouts of other Eurozone countries) seems to have favoured Merkel’s policy towards the European Union. In my view, if the bailed out economies fail to adhere to the austerity guidelines over next few quarters, future assistance will get challenged vehemently, not just in Germany but also in other relatively stronger EU economies like France as well.

How would you rate sentiment among domestic institutions? Is there sufficient capital or inclination to buy the market in the case of further corrections?
Though sentiment is cautious, institutions continue to look for good investment entry points. While foreign institutional investors continue to have a strong bearing on the markets, domestic participation improves dramatically if valuations become extremely attractive. All said and done, India will continue to be one of the fastest growing economies globally over the next few years. This fact is likely to keep India very high on global investor radar in times to come.

What are your expectations from the RBI for September 16? Inflation was recorded recently at the lowest figure in eight months. Could we finally see it tapering off?
Our view is largely in line with consensus, expecting a hike of 25 basis points. The trend on inflation suggests that by March-end we should be close to the RBI expectation of 7%.

What impact could the liquidity situation have on corporates’ capex plans?
High cost of funds does impact corporate investment plans. Capex seems to have already slowed. But global economic fluidity seems also to have coloured domestic corporate sentiment.