MUTUAL FUNDS

In A High Growth Economy, Financial Sector Fortune Is Linked To the Investment & Infrastructure Demand<
16-Dec-11   19:21 Hrs IST

Ashutosh Bishnoi
India's middle to long term relative growth potential is very strong and may see the return of investment & investor confidence provided some improvement happens in reducing prevailing pessimism and policy paralysis. The clarity in policy and investment climate will play an important role for Indian Markets in CY 2012 and it may lead to increase divergence in returns between Indian and global markets. In this scenario, sectors linked to overall investment climate like financials, infrastructure will bounce back. We at Capital Market interacted with Ashutosh Bishnoi, Acting CEO of L&T Mutual Fund, to know the factors which would lead the Indian equity markets in Calendar Year (CY) 2011.

Here are the excerpts:

In Calendar Year (CY) 2011, growth across the world slowed down. Will CY 2012 be better or growth will slow down further? More specifically will India growth fall to 6-6.5% with policy paralysis and foreign capital flight continuing?

The world growth has slowed down in CY 2011 mainly led by Eurozone uncertainty, unrest in Middle East and North Africa, devastating earthquake in Japan among others. While data in US is showing some signs of stability and Japan would recoup after the natural disaster, the growth in Eurozone and high base of Emerging markets (particularly China and India) will continue to drag the overall World growth in CY 2012.

India has been able to accelerate its growth in the last 6 years on account of strong base of services (>10% growth) and which was supplemented either by strong investment growth (FY2005-08) or strong Government spending (FY 2009 & 2010). Although the service sector growth is expected to strong with some moderation, the concerns on the near term growth is arising from sharp slowdown in Investment & Government spending. We believe the investment growth will suffer in the medium term on account of policy pessimism, confidence shortfall, high interest rates & falling ROE (rising cost of land, labour, capital and risk taking ability).

India's middle to long term relative growth potential is very strong and we may see the return of investment & investor confidence provided some improvement happens in reducing prevailing pessimism and policy paralysis.

Industrial capex seems to be showing mixed signs across various industries, what's your view on this theme's market performance in CY 2012? Which are the sectors appearing attractive to the fund managers going forward in CY12?

Industrial capex is a function of demand outlook, reasonable cost of capital and entrepreneurial confidence/ risk taking ability. Demand in India has always been robust demand (being reflected in high capital utilisation levels) and we believe that the concerns of high interest rates may reduce in a couple of quarters. The return of confidence is very subjective and will depend on overall investment climate which we need to watch very carefully. We believe that the current political and policy impasse is not sustainable and it cannot be the norms going forward.

Indian equity markets and Indian Rupee has been one of the worst performing globally in CY11 led by global risk aversion and domestic factors. CY 2011 has been the year of domestic consumption (FMCG and durables) and export competitiveness (IT & Pharma). We believe clarity in policy and investment climate will play an important role for Indian Markets in CY 2012 and it may lead to increase divergence in returns between Indian and global markets. In this scenario, sectors linked to overall investment climate like financials, infrastructure will bounce back. Performers of last year (FMCG, pharma and IT) may continue to be the favourite of the markets for capital protection in near term, but their growth will also eventually slow down on the back of domestic and global slowdown and currency volatility.

Also we believe that CY 2012 will be more a bottom up market on account of very high dispersion in growth and valuations (both inter and intra sector).

With Euro debt issues pressurizing global banks and NPAs piling up on Indian PSU banks, how will the finance sector perform in the Indian markets in CY 2012?

Fundamentals of Indian financial sector have never been affected with global developments even in FY 2009 and therefore we have seen immediate bounce back in the sector. In a high growth economy, financial sector fortune is linked to the investment and infrastructure demand. We believe that the current political and policy impasse is not sustainable and it cannot be the norms going forward. Financial sector has always been linked to economy growth and we are positive on private sector banks.

Midcaps/smallcaps have been crushed very hard in CY 2011. What is your view on their market performance in CY 2012? Which are the sectors within this space that investors should invest or accumulate? What is your outlook?

Midcap/smallcaps is always more volatile both in terms of share price movement and their profitability. The smaller and midsized companies have to bear the pain of negative operating and financial leverage in 2011 and for some of them their business models have come in question. We believe companies having resources (both managerial and financial) and focus to ward off the near term uncertainty will provide very good opportunity for investment. The valuation differential between large and mid/small cap has increase across sectors due to increase risk aversion/liquidity. We find value in these segments across sectors.

How can investors choose between different avenues in the equity category? Also what are the returns that can be expected from them going forward in CY12?

The returns from equity market should be in line with the growth in corporate profitability over long term. If corporate profits growth in 15% CAGR, then one should expect 15% appreciation from the equity markets also. However, the performance of equity market is never smooth and is prone to investment cycle (Rerating/Derating of valuation multiples) driven by liquidity and sentiments.

At this juncture, Indian markets are trading at a discount to their long term average price earnings multiple ratio, which is an ideal situation for long term investment with an expectation of returns atleast in line with the corporate profitability.

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