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Medium-term outlook for FII inflow stays positive: Anand Shanbhag

Puneet Wadhwa/New Delhi 15 Nov 12 | 12:22 PM

With focus back on local issues post key global events such as the US Presidential election and the change of guard in China, Anand Shanbhag, Executive Director and Head of Research, Avendus Securities tells Puneet Wadhwa that investors hope that the policies and reform measures that were revived in September will get Parliament’s clearance in the upcoming winter session. A ‘washout’ of the session may not have severe negative impact on equities, he adds. Edited excerpts:

Q. Have the outcome of the US Presidential election and the change of guard in China made you change your outlook for the global equity markets for the next 6 – 12 months?

A.
The disappointment exhibited by a few pockets within global financial markets with the outcome of the US Presidential election may be short lived. The positive aspect is that the economic policies of the Obama administration are well known leaving little scope for any surprise. The new leadership of China too has been made known to the rest of the world for a while now. A key influence on global equity markets in 2013 would be the economic policy of China.

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We currently have a positive outlook on Indian equities for 2013, partly premised on stable global equity markets. The prominent risk for global equities would be the adverse impact of the 'fiscal cliff' on economic activity.

Q. Have the markets factored in the possibility that most reform / policy measures announced recently could get stalled if the Parliament’s winter session gets washed out?

A.
Investors hopes persist that the winter session of Parliament would extend the reforms that were revived in September. A 'wash-out' of the session would be a disappointment but, may not have a severe negative impact on equities. While valuations did spike up in September from the lows of August they have since subsided to levels that are still well below the stable range.

Further, there is hope that interest rates would finally head down in early 2013 once the inflation genie is tamed. Another silver lining may be presented by the nascent signs of bottoming out of industrial growth.

Q. While on one hand the services PMI came in at a six-month low, Planning Commission chairman has said that deceleration in growth had bottomed out. How do you view these developments?

A.
Even while a definite recovery is yet to happen, there are distinct signs that growth has bottomed out. The trailing-twelve-months growth of the index of industrial production (IIP) has stayed near 0.8 per cent for two months now. This does point to stabilization after 24 months of virtually unbroken fall. We find that segments that represent over half the IIP are now improving their growth. Anecdotal data from a scattering of companies supports this view.

Q. How do you see the key macros and the foreign institutional investor (FII) flows panning out over the next few months given the fact that the government will have to borrow more to meet its widening fiscal deficit?

A.
The government borrowing would indeed be a contrary force to the broad downward direction to interest rates. The gap between domestic and global rates has large room for a fall in rates. Two spells of large inflow from FIIs actually makes 2012 one of the better years.

The surge in flows from July to October was followed by a relative decline in the last couple of months. The medium-term outlook for FII inflow stays positive stemming from the low yields in the developed world and the relative attraction of Indian equities.

Q. You were cautious on the pharmaceutical space when we last spoke in June. How has this strategy panned out for you considering that pharma and FMCG stocks have done quite well recently?

A.
Pharma stocks did not participate in the September rally but their defensive character did reveal itself during the subsequent phase. We continue to advise caution on the pharmaceutical sector while news flow in the space stays adverse. But we prefer select stocks such as Dr Reddy's, Divi’s Laboratories and Cadila. 

Q. If we move away from the blue-chips and the most obvious choices, which other sectors and stocks (large-cap and mid-cap) in your assessment could be potential winners over the next one year? Can you highlight specific stocks from these themes?

A.
Two themes that are likely to unfold during 2013 are the cyclical decline in India's interest rates and the likely return of domestic savings to equities as the memory of past losses in equity portfolios fades out.

These forces, coupled with a likely rebound in the P/E to a 'normal' range would justify a tilt in allocations to 'non-defensive' sectors such as commercial vehicles (CVs), Construction, Engineering, public sector (PSU) banks, oil marketing companies (OMCs), Telecom and power utilities. Our stock picks over the next four quarters are ACC, Axis Bank, Bharti Airtel, BPCL, Cadila Healthcare, NTPC, RECL, SBI, Tata Steel and Wipro.

Q. Have the recent results and the road ahead for India Inc made you tweak your investment preferences? Can you elaborate your stance on the telecom space; are the negatives already priced in?

A.
The results do not alter our sectoral preferences that are shaped by the earnings outlook over four quarters. We stay positive on telecom stocks, as we believe the policy uncertainties are declining after some recent decisions by the EGoM. Current market prices of prominent stocks largely reflect the future impact of the policies.

Sensex

Company Price Gain (%)
St Bk of India321.455.10
Axis Bank481.052.79
Tata Steel473.302.78
Tata Motors532.952.78
M & M1,323.752.53

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