There are no signs of an upside: Ritu Arora
Ritu Arora, CIO, Canara HSBC Oriental Bank of Commerce Life Insurance Company spoke with Jinsy Mathew on the outlook for the markets and the sectors she is bullish on in the current market scenario. Edited excerpts:
What and where do you expect to see the Indian markets over the course of the next few months?
At the current levels, market valuations are near cheap zone at 13x FY13 and 12x FY14 expected earnings, factoring very nominal 11-12% earnings growth for the next two years. This is below the long-term average valuations of 14.5x one-year forward earnings.
Equity markets have historically traded in the range of 11x - 17x one-year forward earnings. There may be a further downside if any adverse global event were to happen. Hence, I would expect the markets to be range-bound with a bearish bias and correct till the time macro-economic adjustments take place.
How would you read the situation in Europe now?
Global macro concerns are looming again with a possibility of Greece exiting the euro-zone. Europe is facing policy uncertainty as call for anti-austerity measures and growth-promoting policies has led to collapse of governments in Netherlands, Denmark and Romania and victory of anti-austerity candidates in France and Greece. It will not be an easy task for the new governments to spur growth and will take long time and harsh steps. The countries most at risk of material contagion are likely to be Italy, Spain, Ireland and Portugal. There are policy steps available to stabilise the financial system. However, building a political consensus for the same will be very difficult.
Do you see a bear market situation in emerging market equities over the next few quarters?
Indian equity markets are trading at lower end of their historical valuation range and provide some downside support at current levels. However, there are no signs of any upside on the horizon. Thus, we see Indian equity markets being range-bound in the near-to-medium term.
Would you take a contrarian buy call on any stocks/themes after the correction we saw over the last month?
While some sectors and stocks have corrected materially over the last month and are trading at historically bottom valuations, headwinds for these sectors still remain. In the near-term, due to lack of earnings growth in the market, we are more positive on sectors and stocks where there is increased visibility on higher earnings growth. We are selectively looking at IT space, banks and some cap goods stocks where valuations have corrected significantly and may offer good return potential from medium term perspective.
In terms of earnings, do you think we have bottomed out or are there two or three quarters more of pain?
Q4FY12 results have mostly been in-line with expectations, barring a few disappointments. The pace of earnings downgrade is slowing down; however, upgrades are still not in sight. Earnings growth expectations have come down materially now and further downside from current levels looks difficult.
Do you think the rupee’s weakness will continue?
Over the last couple of months, the INR has corrected by 14-15% and has been amongst the worst performing currencies globally. Besides the global meltdown, this correction was also driven by fundamentals, due to high fiscal and current account deficit in the country.
Going forward, we believe that significant correction in INR has happened and from here-on any further fall should more be a function of global risk appetite and events unfolding in the euro-zone.