The resilience shown by the Indian markets after the shutdown of the US Government came as a surprise. However, a slew of events that could impact market sentiments are slated for October. These include second quarter earnings numbers of India Inc, a solution to the political jogjam now on in the US on ObamaCare, hike in debt ceiling for the US government due in mid-month and RBI Governor Raghuram Rajan’s move on interest rates at the second quarter review of Monetary Policy on October 29.
In an interaction with Business Line, Lalit Thakkar, MD-Institution, Angel Broking, Mumbai, maps the course of the market in the near future. Excerpts:
The brinkmanship of the Republicans and Democrats and their failure to compromise have drawn the US Government to declare a shutdown. But earlier too, in the US last minute deals have been struck by policymakers on contentious issues to avoid any serious impact on their economy. Similarly, the issue of raising the debt ceiling comes up by mid-October ahead of which global markets are likely to be jittery. But gradually through negotiations policymakers are likely to reach a pragmatic solution.
In case the shutdown is prolonged, would that materially affect the IT sector?
Since the current differences are unlikely to be drawn out beyond mid-October, we do not expect any material impact on the Indian IT companies. The IT spending happening from public services industry of US might get curbed due to this, but it doesn’t contribute a large amount to the Indian IT companies’ revenue.
How do you expect the FIIs to act — will they remain invested or cut their exposure to India?
The macro-economic situation continues to remain tempered owing to the recent pick-up in the Whole Price Index-based inflation and elevated consumer inflation owing to high food inflation, decline in savings and investment rate and sluggish pace of growth. But of late, a silver line is visible on the exports and agricultural growth fronts. In addition, the rupee depreciation has been stemmed and the currency has, in fact, appreciated by about 5 per cent since the beginning of September. In view of these positives, I expect Indian equities to continue remaining attractive to long-term FII investors.
How much does the US tapering, when it is introduced, hit the Indian market?
The recent trend of export growth is expected to continue, going forward, coupled with a compression of imports led by gold imports. I expect the current-account deficit to moderate to more manageable levels. It may even end up below the Government’s assessment of $70 billion. The narrowing of the deficit and expected pick-up in banking capital inflows on the back of measures announced by the RBI would render the Indian markets much more resilient to the Fed tapering.
The forthcoming elections — State and Lok Sabha — would keep the markets volatile. What is your advice to investors?
In the near-term, we take a somewhat cautious approach in the light of cyclical headwinds. The investment cycle is likely to take a backseat till the political overhang continues and the outlook for corporate earnings in cyclical sectors is likely to remain muted during the fiscal year.
At the same time, owing to the signs of recovery in advanced economies and rupee depreciation on a year-on-year basis, we have a positive outlook on export-oriented sectors, such as IT and pharmaceuticals. We also maintain a positive bias on defensives, such as the FMCG sector.
We are positive on the metals sector as well considering recent capacity additions and meaningful underutilised capacity in the sector. We believe that it is likely to be utilised for sharp increase in exports, going forward, aided by improving global fundamentals.
Do you expect any market correction?
In case of a further correction, I believe it is the high beta cyclical stocks that are likely to be adversely impacted.
The banks, PSUs in particular, have taken a knock. How long would they have to endure pain before some recovery sets in?
Apart from the sectoral cyclical headwinds like elevated interest rates, weakening growth and rising inflation, PSU banks also face structural challenges, such as low capital adequacy, higher competition, etc. Although PSU banks are currently trading near their historic low valuations, their fundamental investment case appears weak enough and any improvement in their fundamentals from hereon would largely depend on broader economic recovery.