Despite the international ballyhoo over nuclear-related economic sanctions on Iran and their impact on crude oil trade, oil prices are unlikely to head sharply higher in the long term, so the market sentiment would not get unduly unsettled, says Nitin Jain, head-capital markets (individual clients), Edelweiss Financial Services. In fact, he adds, with corporate earnings showing signs of a turnaround, things are looking better for the equity markets. In an interview with Sachin P Mamaptta, Jain explains where investors should put their money, which sectors he would avoid now and why gold has become a better investment for foreigners than for Indians. Excerpts from the interview:
Q: How would you characterise the current results season?
A: Well, companies have declared better results in the current quarter so far. Sales have shown a strong growth at almost 25%, compared to the same period the previous year. But, as expected, operating margins have been lower at 17%. Among sectors, consumer, private sector banks and pharmaceuticals have proven to be the brightest sparks. Our sense is that downgrades in earnings estimates will now come to a halt and, going forward, things could get better.
Q: Are the current liquidity inflows due to quantitative easing in Europe?
A: Yes, we do believe that the current rally to a large extent is because of liquidity injection by the European Central Bank (ECB). The €500-billion Long-Term Refinancing Operation (LTRO) carried out by the ECB in late December, has eased the pressure on liquidity in the European banking system. As a result, sovereign yields (which are indicative of the cost of borrowing) on most European countries like Italy and Spain have eased off.
Q: Could the scheduled second round of easing this month bring about a similar flow of liquidity?
A: It would certainly have a significant impact on all asset classes, including equity. According to market sources, the ECB could carry out LTRO 2.0 to the extent of €1 trillion (Rs 65 lakh crore). Furthermore, the ECB has kept this operation open-ended, indicating that this injection can continue. Having said that, asset prices have already been buoyant on the basis of this liquidity infusion and a certain degree of this good news is already in the price.
Q: Which sectors are you bullish on and why?
A: We like interest-rate-sensitives like banks and capital goods for the first leg of the rally. We believe that corporate capex (capital expenditure) will eventually pick up as and when the RBI begins to cut rates, and thus quality stocks in beaten-down capital goods space will rally the most. Consumption could again be in favour and would provide interesting bets.
Q: Which sectors would you rather avoid now?
A: We would recommend staying away from companies with stretched balance sheets and poor business visibility. Weaker names in construction and real estate should be avoided.
Q: Is it too early to label the rally a new bull run?
A: We believe that the current year could see a strong liquidity-driven rally with some minor corrections. We will, however, get a clearer picture as the year passes by and government action on key policy issues like subsidies and fiscal deficit begins to emerge.
Q: How could risks pertaining to geo-political factors in the Middle East (particularly Iran) affect the price of crude oil and consequently India?
A: We view this situation as a significant risk to our bullish hypothesis, with Brent crude touching $117 a barrel. With increasingly harsh sanctions beginning to affect the Iranian economy, however, it is possible that Iran may back down, leading to prevention of hostilities. If a hostile situation ensues, Iran could face short-term impact on oil flows out of the Gulf.
Our sense is that over a period of time, the US and its allies will hold considerable military influence, thereby preventing any long-term blockages at the Strait of Hormuz. Therefore, whatever the impact on crude prices, it will remain a short-term effect at best.
Q: What advice would you give retail investors at this point in time?
A: We have recommended our clients to invest in equities and reduce cash component. Furthermore, any dips in the market should be used to add to positions.
Q: Currently, with more liquidity hitting global markets, is gold likely to emerge as a popular play once again?
A: With surfeit of liquidity in the global economic system, our sense is that riskier asset classes like equity and commodity will outperform. Comparatively, gold may remain a relative underperformer in the near term.
Given the long-term depreciation in two key currencies, namely the US dollar and the euro, however, our sense is that the value of gold may continue to run up. In terms of gold as an asset class for Indians, it faces stiff competition from fixed income instruments (whose yields are around 10%).
This is in contrast to foreign countries where fixed income yields are around 2% or 3%. Hence, it is practically a much better asset for foreigners than it is for Indians.
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