Volatility seen, but markets to put up a better show

Markets will be volatile but better than what it was in the recent past, says Niraj Kumar, Head – Equity, Aviva Life Insurance Company India. He believes that in the current market scenario, there are several stocks which are available at reasonable valuations, giving an opportunity to build a long-term quality portfolio. In an interview with Business Line, he spoke about his outlook on the equity market, the short-term factors likely to affect it and what sectors investors could look to invest in at this point.

Where do you think markets are headed from this point onwards?

Indian equity market has moved up recently, thanks to the much-awaited Government reform push towards stimulating economic growth and continued easing of liquidity globally. India has seen strong FII inflow of around $17 billion so far (till October) in 2012. As a result, Indian markets are trading around 13.5x one year forward earnings, close to the historical average of about 14x. Given that the macro-economic environment remains weak at present, we may not see a significant upside. However, from a valuation perspective, downside too may be limited. At present, the market seems to be in a consolidation zone. Valuation across sectors has seen wide divergences, and hence sector-specific valuations may change, leading to divergent relative performance across sectors.

Going forward, we expect a lot more volatility, but we do expect the market experience to be better than the recent past.

What are the investment strategies that insurance companies are looking to adopt now?

Insurance companies are long-term investors and tend to invest more aggressively when the markets are falling. In the current market scenario, several stocks are available at reasonable valuations giving an opportunity to build a long-term quality portfolio.

One should stay invested and incrementally buy as and when the markets correct, especially if the correction is due to external factors. There is also a need to have a much more balanced view, a diversified approach. The current weakness in the Indian market is more pronounced in sectors which are linked to Government policy making, like infrastructure and power. The market has taken a very polarised view of sectors, with a very high premium to sectors and companies where there is earnings visibility, and a steep discount to sectors which have near term uncertainty on growth. This throws up opportunities for long-term investors to buy quality business into weakness in the market.

What are the factors that are likely to affect markets in the near-term?

The overall direction of global markets will be determined by events unfolding in Europe, which will indicate whether there is some stability and improvement in the Euro Zone. Measures from ECB (European Central Bank) in the form of rate cut or liquidity injection may provide a trigger to the markets. Besides this, continued sustenance of growth in the US and a pickup of growth in China will be important.

Domestically, continued Government action on reviving infrastructure investments and move to improve fiscal deficit will be important determinants of market direction. Political stability and the much-awaited RBI’s action to ease liquidity and cost of borrowing in the system, are likely to be the critical factor for equity market. A fall in crude prices could also ease a lot of problems pertaining to fiscal deficit and inflation for India.

How has the current results season been according to you?

The current results season has been a mixed bag so far, though the positives seem to have been a lot more than negatives. Sectors such as FMCG, pharma, private banks and IT have reported good results except few exceptions. However, infrastructure, PSU banks, capital goods companies, and cements have seen some pressures. On an overall basis, topline growth across sectors has been in line with expectation, though margin compression has been seen across sectors.

Which are the sectors and stocks you find attractive at the moment?

We are focused on a bottom’s up approach in this market because of huge divergence in terms of valuation across the sectors and within the sectors. The fact that earnings growth in India is unlikely to slow down decisively from here on despite the domestic weakness and a global slowdown, will support valuations at around 13x times. We believe any correction actually presents a good opportunity to buy quality Indian stocks. If the Government’s recent initiative and momentum of reform continues, it will accelerate the economic activity and provide significant impetus to the growing economy.

>sneha.p@thehindu.co.in