‘Investors want hard decisions on oil reforms’

With global economic woes easing gradually, Indian markets from here on would move largely on domestic factors, says Neelesh Surana, head-equity, Mirae Asset Global Investments (India). With state elections and the attendant political compulsions that spawn populist give-aways almost out of the way, Surana thinks it is time for the government to get cracking on big-ticket reforms and tackle long-time impediments to economic growth.

In an interview with Nitin Shrivastava, he says that though market valuations are attractive on absolute basis, it continues to be a stock picker’s market.

Markets continue to build on the gains of January. What do you think is going on?
Till a few months back, there was a lot of disbelief and accumulation of negatives that led to a deep correction in the markets. At the same time, these negatives were more than priced in and valuations became quite attractive. What probably changed the course is that markets, being forward-looking and a leading indicator, rallied sharply as soon as liquidity came in.

We have seen some changes on the global front with respect to positive economic data coming from the US, and some stability coming in Europe. The long-term refinancing operation (LTRO) initiated by the ECB (European Central Bank), too, has aided the markets. On the domestic front, there are clear signals that interest rates may have peaked and that we would see a reversal in coming months. Also, there is hope that some policy actions would be initiated.

What might cause a further near-term upside in the domestic markets?
India underperformed significantly because of the domestic factors also. So even as we have seen the rally coming in due to money flowing into emerging markets, the chances of our markets moving up from here on or otherwise are the same as the factors which had led to a fall earlier.

Interest rates in India are still higher than what they are in the rest of emerging markets. We have an issue with respect to high oil subsidy burden and high crude imports which impact our fiscal and current accounts. So from here on, it’s more to do with domestic factors rather than international that will drive the markets.

What are investors most worried about - slowdown in investments or the fiscal situation?
There has been too much talk about policy initiatives requirement in certain investment-led sectors over last one or two years. Ours being a growth economy, there’s no doubt that for us to bridge the fiscal deficit, we need to play on growth which may only pick up pace once the investment cycle gets kicked off. And for that, we need reforms in big-ticket size verticals like power and other investment areas. 

What is more important, however, is how we address the entire fiscal deficit situation, particularly related to oil prices. Over the last two months, there have been certain attempts like in retail sector and the reforms to get in qualified foreign investors (QFI). What we would want to see as investors is some hard decisions on oil reforms, so that subsidy burden is reduced, making fiscal deficit manageable and easing pressure on interest rates. Even as one is not sure of when these may happen, the intent seems to be there and there seems to be some headroom for government to take action after the elections in five states, because political compulsions would be relatively less then.

How do you see corporate earnings and the economic growth spanning out for the next fiscal? Is there a case for more downgrades?
One interesting part about India is that even as one talks about policy issues and its impact on power sector and so on, there are many businesses in India which haven’t seen too much impact. The overall corporate earnings growth is still likely to grow around 15% even though the base has come down and the economy is likely to grow around 7% plus or minus 0.5%.

We are not reading too much into what would happen this quarter or the next as there would be pressures on margins due to forex issues, high input costs and other factors which have been there throughout the fiscal.

As such, the earnings for fiscal 2012 have already seen close to 18% downward revision and one needs to look at fiscal 2013 earnings which would grow around 15%, after considering earnings downgrades so far. At current assumptions related to currency and global scenario, the chances of further earnings downgrades appear low, given the composition of index which to a large extent covers global commodity-related sectors and also a portion of steady consumption-led themes like FMCG, two-wheelers and pharmaceuticals.

Which are the sectors or areas you are positive on in the near term?
We continue to remain sector- and size-agnostic and are taking a bottom-up approach, picking stocks across sectors where we see value. Autos should do well given the change in the interest rate cycle while IT and manufacturing exports would benefit from currency depreciation. We also like select midsize auto ancillaries like tyre and battery manufacturers; and are selectively looking at bank stocks where pain in terms of NPAs (non performing assets) is less.

From a portfolio perspective, we are focusing on banks with low absolute restructured assets and low gross NPAs and some of the housing finance companies and NBFCs where the NPAs are not a big issue. In the infrastructure space, we are focusing on high-quality names that do not have a need to raise money to grow their businesses. 

Which are the ones you are avoiding in the near term?
We are avoiding some of the high-priced or richly valued sectors — the so-called defensives — at the moment, given that there are stocks in the other half which are available at attractive valuations. At the same time, we are not looking at weaker businesses even though they are available cheaply.