Nitin Jain, CEO, Retail Capital Markets, Edelweiss Financial Services, talks to Money Today about the current stock market scenario and the sectors investors can consider.
Q. THE STOCK MARKET IS HOVERING NEAR ITS ALL-TIME HIGH RIGHT NOW. HOW DO YOU SEE THE MARKETS AT ITS PRESENT LEVEL?
A. There is a discernible improvement in market sentiment from pessimistic a few months back to optimistic currently. The delay in relaxing the Federal Reserve's monthly asset (bond) purchases has helped emerging markets, including India. Earlier this year, the emerging market pack came under pressure after Ben Bernanke (Federal Reserve Chairman) hinted at scaling back QE (quantitative easing) sometime this year.
In India, RBI Governor Raghuram Rajan has taken meaningful steps (FCNR deposit mobilisation and banks' overseas borrowings have raised $13bn) to stabilise the fragile rupee. In addition, he has focused on containing inflation (by hiking repo rates by 50 bps) and steps to reverse liquidity tightening (MSF, or Marginal Standing Facility, rate down by 150 bps).
The government has done its bit by sticking to fiscal consolidation and concentrating on improving the investment climate.
Q. WHAT ARE THE IMMEDIATE TRIGGERS FOR THE MARKET? WHAT SHOULD INVESTORS LOOK AT IN CURRENT MARKET CONDITIONS?
A. Gradual improvement in India's macro-economic scenario will be a catalyst. Inflation is likely to moderate as a consequence of RBI rate hikes and economic downturn (about 5% GDP growth in 2013-14). A more benign inflation environment (5-6% Wholesale Price Index and 7-8% Consumer Price Index) will give RBI room to scale back repo rate hikes and engineer a growth revival.
Much of the benefits of policy initiatives introduced in the past one year are likely to reflect in 2014-15 and beyond. A pro-growth, pro-reform regime at the centre (after the next Lok Sabha elections) will also be favourable for Indian markets.
FII, or Foreign Institutional Investment, inflow is likely to continue as long as the Fed maintains a dovish monetary policy. Even if the Fed decides to kick off QE tapering, Indian stocks would continue to attract FIIs on long-term prospects.
Another trigger will be improvement in corporate earnings following gradual improvement of domestic and overseas economic conditions.
Investors should look to follow a bottom-up stock selection process rather than taking a broad call on the overall markets.
Q. WHICH SECTORS LOOK ATTRACTIVE AND WHY?
A. IT and auto sectors, besides select retail non-banking financial companies, or NBFCs-Bajaj Finance, Gruh Finance and Sundram Finance-look good. We believe India's consumption has strong potential despite the recent slowdown.
The IT sector has been a beneficiary of rupee depreciation and gradual improvement in key developed markets (US and Europe), while the auto sector looks good despite poor performance in the past few months.
NBFCs that focus on the retail segment will continue to do well. Unlike corporate lending, asset quality in the retail sector is intact.
Q. IS THERE A STRESSED SECTOR SHOWING SIGNS OF RECOVERY THAT CAN BE A LONG-TERM BET?
A. Engineering and capital goods is a potential sector that could generate good long-term returns. This has been a beaten down sector due to prolonged slowdown in domestic infrastructure and industrial capital expenditure (capex) cycle. The government seems to be taking remedial steps now, such as fast-tracking key regulatory clearances, awarding and restarting projects, to revive the capex cycle. These stocks are cheap as well from the valuation perspective due to muted earnings.