Anup Bagchi, MD & CEO, ICICI Securities, talks to Tanvi Varma about the outlook for 2012 and factors that investors should watch out for when entering the equity market.
What is your outlook for the market for 2012. Also, how are the variables, interest rates and corporate earnings, likely to play out?
This year will be volatile as markets will be highly sensitive to events in the West. In India, we believe the rate cycle has peaked. Going ahead, the timing and magnitude of rate cuts will lend positive momentum to the capex cycle so that demand is revived and the consumption cycle keeps ticking. The 375 bps rise in interest rates from 2010-11 has muted earnings of corporates to single-digit growth rates. High commodity prices and the depreciating rupee will also pressure earnings in the next quarter of the financial year and could affect earnings in the beginning of the next financial year as well. Hence, we have downgraded our estimates for Sensex earnings to Rs 1,109 in 2012 (FY) and Rs 1,273 in 2013 (FY) compared with the earlier estimates of Rs 1,165 and Rs 1,346, respectively.
Which factors will affect the outcome for 2012, global as well as domestic?
Globally, the euro zone crisis and progress on a resolution or a bailout programme will remain crucial. Coupled with this, a weak US economy and slowdown in the Chinese economy will also be vital in terms of gauging liquidity flow and commodity price trends, respectively. On the domestic front, the government's policy action will be crucial to the economy's growth. Also, the peaking interest rate cycle will be a key positive in keeping the investment cycle running and consumption demand intact. Other crucial factors are crude oil prices and movement in exchange rates.
What is your view on commodities for 2012? Considering they, especially gold, have outshone other asset classes, what would you recommend?
Commodities, mainly bullion and oil, have been resilient so far in the wake of the European crisis, uncertain outlook in the US and moderating Asian economic growth. We believe that gold has benefited from increased risk aversion and should only be kept as a hedge against inflation. Equities have been more rewarding than commodities over the long term.
Do you think one should wait before making fresh investments or cash out of existing investments and wait for a definite signal in this market?
In these environments, timing the markets is extremely difficult. We believe that any sharp cuts should be bought into from a three- to five-year perspective. Buying is recommended in large-cap and selective quality mid-cap stocks.
Which sectors are likely to do well in 2012 and what are your reasons for choosing these sectors?
We believe 2012 would largely witness stock-specific action. In terms of sectors, we are inclined towards pharmaceutical, technology and automobile sectors owing to their lighter balance sheets and better growth prospects.
Do you see foreign institutional investors (FIIs) returning to the market in 2012 and what is likely to bring them back?
FII activity in 2012 would depend on the economic growth visibility and stability in key economic regions, such as the US and the euro zone. India has been rewarded historically for growth consistency, for which action on the policy front is required. FIIs have been patient enough in 2011 as net outflow is minuscule at $200 million even though the rupee is hurting them along with 22% year-to-date erosion.
What will be the role of domestic institutions in reviving the markets?
Domestic participation depends on net AUM accretion in both the mutual fund industry as well as the life insurance industry. Current inflow is muted but we have seen growth returning quickly depending on sentiments as savings are parked in other asset classes.
What would your advice be for retail investors in equities for the current market?
Though 2012 may see a volatile environment, invest in a systematic manner, preferably a major portion in large-cap firms and quality mid-cap stocks, with a horizon of three-five years.