Need to find middle path between austerity measures and downturn risk: Anand Shanbhag
With all eyes on the upcoming EU Summit, Anand Shanbhag, executive director and head (research), Avendus Securities, tells Puneet Wadhwa that the European Central Bank (ECB) and the governments are committed to hold the PIIGS nations within the euro zone. At the domestic level, revival in foreign institutional investor (FII) flows will require appetite for emerging markets and an improvement in the economic and political environment. Edited excerpts:
There are three more FOMC meets before the US presidential elections later this year. Do you think the US Federal Reserve may actually be in a wait-and-watch mode before unleashing a fresh round of quantitative easing?
There is good reason to watch events, particularly in Europe, before taking a plunge. While many may argue that the US economy could do with another dose of stimulus there are a few positive changes in the past month, the effects of which may creep in slowly e.g. the fall in crude oil prices.
What are your expectations from the upcoming EU summit? How do you see things unfolding for the PIIGS nations over the next few quarters?
EU leaders would do well if they convince markets that they are committed to avoid all extreme fallouts of the crisis. The leaders who have won popular mandates in recent elections need to find a common path that strikes the balance between the pain of austerity and the risk of a prolonged downturn. The example of the action taken in Spain reinforces the view that the ECB and the governments are committed to do the needful to hold the PIIGS nations within the Euro zone.
Is there a case for the Indian markets outperforming the emerging market (EM) and BRIC peers given the soft crude oil prices and rupee, or will economic headwinds and the political logjam keep the gains under check?
Crude oil prices and the fall in the INR only add to the arguments in favour of a rebound in Indian equities. However, the political situation presents a strong contra force. The economic cycle is disappointing, but even if it persists, the markets may take heart if there is evidence of commitment by the government to tackle the multitude of problems. Sensex is capable of exceeding 20,000 by end of FY13.
Despite several ratings revisions amid weakening rupee, dwindling earnings and the stalled reform process, we still have been able to attract healthy foreign institutional flows in 2012. Could this change, going forward?
FII flows in calendar 2012 present a mixed picture with extremely strong inflow in January and February. This coincided with renewed global appetite for emerging markets following action by the ECB.
This force weakened in March just as domestic events in India pointed to sustained weaknesses of the India story. These include the movement in the index of industrial production (IIP) and wholesale price index (WPI) numbers and a few proposals in the Budget. A revival of FII flows would require both sets of forces to revive, viz a recovery in global appetite for emerging markets and an improvement in the domestic macro and political environment.
Which sectors are you bullish on in the Indian context? Can you highlight specific stocks from this theme?
Institutional investors with stable funds and a longer term mandate may not focus too closely on near-term earnings. Most sectors within India currently appear to hold value but the triggers to unlock it are uncertain for some. Currently, we are cautious on pharmaceuticals where the earnings edge is waning. We believe a bottom-up stock picking approach is more justified. Some of the stocks we like are Ashok Leyland, Bharti, HPCL and LIC Housing.
For how long do you expect sectors like cement, oil and gas and fertilisers will have to grapple with the regulatory overhang? Do you think valuations of companies in these sectors are reflective of this?
Valuations do reflect these concerns. The regulatory overhang is a function of economic forces as well as policy. The former has a strong link to global events e.g. crude oil prices and cross-border capital flows.
Do you think the RBI’s recent policy measures regarding infrastructure bonds will help attract flows in a sector that has seen more announcements than implementation over the past few years?
The most recent policy measures will relax some of the financing constraints. Overall, these will have little impact on most projects. The key constraint for a lot of projects arises from government policies or market conditions. A material improvement in funding availability would also require a change in the latter.
What do you make of the statements pertaining to QFIs, G-Sec and ECB limits?
The proposals expand the room available to foreign investors for buying government bonds. The additional amount does not appear to be material in the context of the flows that may be required to stem the decline of the rupee. The $10 billion ceiling for ECBs too, may be good for select companies in the manufacturing and infrastructure sector but may have little impact on the exchange rate.