The banking sector is an attractive buy at current valuations <
12-Dec-11   17:55 Hrs IST

Mr.Nitin Rakesh
Valuations for infrastructure sector are attractive. However, unless ordering and execution picks up and is reflected in terms of numbers, the sector may remain an underperformer. We at Capital Market interacted with Mr.Nitin Rakesh, MD & CEO of Motilal Oswal Asset Management Company, to know the factors which would lead the equities 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?

Growth has slowed down to 7% in Q2 FY12 from the 8% + that we have seen in 2010& 2011. Though there is reason to be pessimistic, I think growth should hold between 7-7.5% for FY13

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?

There are no visible signs on when industrial capex would revive. Till further clarity, it is an underweight sector for us

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?

The banking sector is an attractive buy at current valuations. With inflation and interest rates set to come down in the quarters ahead, incremental NPA's should show a decelerating trend beyond the Jan-March'12 qtr. Markets have already discounted an increase in NPAs for the next two quarters and hence should be bought at current prices

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?

The first upmove will always come in largecaps, which would then be followed by an upmove in midcaps and small caps. Midcaps have always been a bottom top approach rather than a sectoral approach for us

What Sensex/NIFTY level do you foresee at the end of CY 2012 and which stocks/sectors/themes will be the major drivers for the rise/fall vis-à-vis end-CY 2011?

It is difficult to give gauge an exact number for the sensex or nifty at the end of CY12,.Suffice it to say , if euro problems do not aggravate, we should be significantly higher than where we are today

I would find comfort in owning themes like Banks, Consumer, IT and pharmaceuticals for the whole of CY12

In India, consumption theme has outperformed all other themes over the past couple of years. Will the trend continue in CY 2012? Can India's outsourcing theme outperform other themes in CY 2012?

I would agree with both your hypothesis

Infrastructure remains a major laggard. With policy/execution/reform paralysis in government and high interest rates, what is your view on this segment's market performance in CY 2012?

It is difficult to say. Valuations for this sector are attractive. However, unless ordering and execution picks up and is reflected in terms of numbers, the sector may remain an underperformer

Gilt Funds category has been facing net outflows since December 2010, what has been the reason behind it. Do you see any reversal in the trend in CY 2012?

High inflation, high fiscal deficit, tight liquidity conditions, continuous supply of G-Secs and regular policy rate hikes by the RBI resulted in the interest rates moving upwards in the last 18 months.

During this period returns from medium to long term Gilt funds have been low. Returns from Gilt funds are a combination of coupon received and change in price of Gilt investments. In an increasing interest rate environment, the prices of long term bonds decreases. This results in returns from investment in them being poor in such an environment. As a result there were large outflows seen in the Gilt Fund category.

The reversal will be depend on how the interest rate scenario pans out. If interest rates decline, the prices of long term bonds will rise and the investors will get good returns from Gilt funds. In such an environment, investors would like to take advantage of the rally in G-Secs. Yields on 10 year G-Sec, after moving to 9% levels, which is the 3 year peak levels, have already declined to 8.5%. If the macroeconomic factors like inflation, deficits both fiscal and current account, GDP & systemic liquidity etc improve and are according to the regulators expectations then we may see some softening of policy rates by the regulators which may take the market towards lower interest rates from the current levels. However having said that the timing & pace of rally will depend upon how the general economic scenario pans out as we cannot negate totally the shocks that may come from international events.  

What kind of debt funds would you be recommending to your investors right now and what are the expected returns from them? Given your expectations of where interest rates are headed next year, would you be advocating short term plans or longer term plans which can take advantage of the double indexation facility?

In the present scenario where the interest rates are near high if not yet peaked it makes sense to move into a long duration fund as, when the rates begin to fall the long duration funds will generate maximum returns. So ideally an investor in the present scenario should invest in longer duration funds. The rates in the coming 18-24 months appear to be going southwards hence if the investor has the appetite to hold on for the said period then he or she should take the advantage of long duration funds as they will be benefited with the coupon payments along with the capital appreciation due to fall in the interest rates, that will be reflected in the NAV.  

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