Sunil Singhania, Ex. VP - Equities, Reliance Mutual Fund, tells us what to expect in 2009 and what sectors he is betting on.
- What are the key concerns of the Indian market in the medium term?
In the medium term it will mostly be fundamental concerns. We have seen a big slowdown in a number of sectors. There is the old inventory of raw material lying around and there is a lot of marked-to-market loss in that. Because of the demand slowdown a number of companies are operating at sub-optimal capacities. These two factors are going to put a lot of pressure on profitability. And there is also higher interest cost because of higher interest rates putting further pressure on profits. The results will be disappointing in the next two quarters. But the market already expects it and has already discounted it. It is not going to be an unexpected shock.
- Do you see the situation improve this year?
On the fundamental front, the steps taken by regulators and governments have been positive. From a scenario where capital was expensive, capital is now available in plenty. And at a reasonable cost. It is only a matter of demand reviving. But looking at the scenario in India, you might see stability come back faster than people expect. The global scenario might be more challenging since there is a systemic problem in the developed economies. This year expect a choppy market but more than the indices moving up and down you may see individual stocks performing at different points of time.
- Do you see the FIIs coming back anytime soon?
It's all a matter of sentiment. Without sounding too optimistic, I can say that stability is reemerging. And at this point of time, India is better off than a lot of other countries. We have not seen any systemic failure of the banking system.
Corporate are facing profitability pressure but other than select sectors there are no defaults taking place to the extent of what is happening in the developed world.
We are not talking about negative GDP growth, but 6 per cent, which is good. In the next two years we will not see 8% growth, but if we take a 5-year perspective, why not?
We are not leveraged. We are still a country of high savings. The borrowings for homes is done ownership and residence –not sub-prime borrowers.
The rural economy too is doing well. As a country, we are 60-65% dependent on the rural economy – whether it is agriculture or domestic sector services. This does not get impacted too much by what is happening on the global front.
- How important is an improvement in the global scenario to India?
We cannot escape the global scenario. A few sectors like IT are dependent on the global economy. A reasonably sized commodity sector which is not export dependent but gets impacted by what is happening on the global front. If the global economy is stable, Indian corporates are able to raise money through equity and debt overseas. If the global market once again get into a situation where money gets to be very tight, then it will hinder India's growth potential.
- When the market picks up, which sector will be the one to move first?
Right now the call is that interest rates are falling and the economy is reviving. So the sectors to get impacted first will be the interest rate sensitives like construction, capital goods and, to some extent, auto companies. These stocks have fallen a lot and they would be the direct beneficiaries of falling interest rates. But I would be more cautious and not get euphoric too early.
From a valuation perspective, pharma looks good with its significant entry barriers. They are big beneficiaries of rupee depreciation since they are export oriented and raw material costs have dropped significantly. This sector will grow by 15-20%over the next few years.
IT will not command the valuations it used to earlier. We don't see the problems in the U.S. disappearing over the next one year. The IT exposure to financial services is quite high. The near term earnings may not be at risk due to rupee depreciation but the kind of growth which IT companies enjoyed a few years ago will no longer happen.