Jitendra Sriram, MD & Head of Research at HSBC India says the house is more positioned towards equity markets at this juncture because we are a cusp of recovery. He expects equities to give better returns than debt markets in 2015.
In 2014, debt was a big play because India was probably the only market amongst emerging and Asian markets with higher interest rates. However in 2015, rates could move higher globally and soften in India.
He expects a 50 basis points rate cut by RBI through the year. Meanwhile, US Fed is also likely to hike rates by Q3 of 2015 because the US GDP growth is more conducive for a rate hike, says Sriram.
According to him 2015 is going to be an earnings tracker and India is likely to grow in mid-teens
For the upcoming year, the house would focus on industrials and metals space because he thinks industrials would be a big play on the IIP recovery. Metals too could see recovery post coal auction etc, he adds.
On the other hand he is skeptical of upstream oil companies since they are directly corelated to weakness in crude prices and autos because they are likely to see some demand pressure due to excise duty rollback.
He is also upbeat on the utility space and sees telecom consolidating with the return of pricing power.
According to him there could be lot of money rotation in the defensive space.
Latha: What sense you are getting first of 2015 at macro level for the market, is it as good a year, is it likely to return 30 percent, is it likely to return half that amount or is it likely to be one of those meandering years?
A: I would argue that probably 2014 was a year of a rerating catalyst; a stable political disposition also the fact that probably the macro is on the mend, the crude prices have come off, so it augurs well for India macro report card. However, all these things have got discounted in the theme.
My suspicion is that 2015 is going to be an earnings tracker, so if I look at where we are positioned right now – we are probably arguing for about somewhere in the mid-teens kind of a growth for India and I would suspect that after the initial phase of rerating catalyst, you should probably expect the market to trend in sync with earnings. So that is the kind of return we would expect from the market.
There are multiple other factors; global factors like when the Fed starts acting or what is the extent of dollar strength, telecom auctions, coal auctions all these things are there in one cue but that would be the main things to watch out for.
Sonia: You were pointing out the gains that one could see in the equity market but Indian debt is also becoming a very attractive option with the potential lowering of interest rates. How would you allocate assets in 2015 between equity and debt?
A: I would say debt in 2014 has been the big play because India had very high levels of interest rates compared to rest of the emerging markets or rest of Asia and as a result you have had a situation which people have come in. In fact, if I recollect correctly the debt flows this year have been as big as the equity flows so far.
Therefore, I would reckon that you will have a situation that next year you will have a kind of disconnect where globally you will start seeing rates starting to inch up because of Fed moves whereas India could potentially have some degree of easing whether it happens in Q1-Q2 – that is till left to how the inflation trajectory plays out but I would definitely expect and we are forecasting that we should see about 50 bps easing in RBI rates through the year.
So, I would definitely say that you should have that situation play out for the Indian markets. People with stock of debt will see that impact filter through in terms of appreciation there but at this juncture I would be more positioned towards the equity market because we are on the cusp of a recovery and that will start getting built in over the course of the next two quarters or so. And as that comes in and we start playing the earnings growth trajectory and the uplift in earnings, I would expect that equity from hereon should start seeing better returns than what debt has given thus far, but we are talking about two very different risk appetites here.
Latha: There is still that event of Fed rate hike; there is still the event of potential red flags in Europe as well. What are the kinds of global jitters you see in spite of it being well discounted, will there still be some fairly volatile jitters in global fund flows around or before the Fed rate hike. When would that be?
A: Our call is that we are looking at Q3 of next calendar when Fed starts to make its move. I think volatility will come back and that is something which we are more certain about that volatility will be there to bite when the noise around the Fed starts building up, when the actual timing of the hike starts to come through and the latest print of gross domestic product (GDP) from the US is also probably more conducive to argue for a rate hike as such. So that is definitely going to be there.
I would suspect that the other part is probably people are looking at only one part of the good story and we need to look at both sides of the coin. One part is it is great news for India macro that crude has slipped and it has come down to the levels that it is at currently but the other factor is that weaker crude prices also reflective of probably a weakness in global demand as well and which could mean that you could have a lot of oil exporting countries which find it difficult to balance budget, which find it difficult to undertake fresh capex and so on which might have some bit of trip up in terms of what we look at for growth coming through.
Sonia: Sectorally what could be the leaders of 2015?
A: If I look at the overall market in India, I would say that the two sectors that probably are still depressed in terms of their overall capital efficiency is industrials, which will probably be a big play on the Index of Industrial Production (IIP) recovery which comes through. So that will be one sector to watch out for in terms of leading the market. Therefore, industrial is something that we are quite excited about.
The second area is the metals pack and there the trigger is more in the first quarter as they start bidding for resources when the coal auctions and so on come forth and these two sectors could potentially be the triggers that might probably be what one has to look at. To give some colour on the metal sector for example in the mid-2000 we used to have a return on equity of 30 percent plus whereas it is probably in the sub-10 percent right now. So you have a large degree of catch-up which can come through in this sector.
Latha: The other point you mentioned about the weakness in the global economy especially in commodity exporting countries should be factored in into the demand scenario for Indian companies. Is there anybody’s earnings that you would trim therefore, any sector that would be casualty of weak global growth in some pockets?
A: One which can take a little bit of knock around is upstream oil companies, so that is something which is clearly directly correlated with the weakness in crude prices. The other one is something where you are seeing the implications like higher taxation level like autos could be another area which potentially if you have excise increases and stuff like that, at the end of the day there will be some elasticity of demand which will come through in the near-term. It may not continue for a long period of time but at least temporarily there will be some dislocation in demand.
So these sectors could see some pullback in case there is some kind of nervousness around the environment.
Latha: As you step into the new year, where would you be weighted?
A: We would definitely be more overweight on industrial space, so whatever index you are looking at or you are comfortable tracking – that’s a sector that we would be overweight on.
Utilities is another area where we think there is lot more juice left because that’s a sector that has not performed too well on the market thus far.
Telecom is also another area where the competition level is starting to come off and you are seeing some degree of consolidation and a slow return of pricing power as well, so that is another area that looks interesting.
However, other than that I would say the defensive space which has seen a big surge in RoEs over the last few years will probably be the ones where money might be rotated out of, so whether it is staples or healthcare, you might see some money getting pulled out of these sectors and move into areas which potentially offer richer growth compared to these more defensive sectors now.