‘Policy action is required to revive infra investments’

Domestic macroeconomic conditions continue to remain challenging, cautions Ritu Arora, chief investment officer of Canara HSBC Oriental Bank of Commerce Life Insurance Company (that has garnered assets worth Rs4,291 crore in less than four years of operations.) So, markets are unlikely to soar in the near term, she reasons. In this interview with Nitin Shrivastava, Arora says that broader Corporate India may continue to show muted single-digit growth this fiscal unless there is a sharp decline in interest rates and concrete action on the policy front by the government.

With the results season underway, how would corporate earnings pan out for the fourth quarter of 2011-12? And how would they fare in the next fiscal?
We expect benchmark earnings growth for Q4 to be lacklustre in the 10-12% range. Broader corporate earnings growth would be even more subdued at 5-7%. As things stand today, there is no earnings upgrade in sight for the next fiscal year and we expect benchmark earnings to remain in 10-12% range.

Markets have been moving in a range over the last two months. What’s holding the markets from moving sharply in either direction?
Market has been range-bound and is likely to remain so in my view. Market valuations at 14 times fiscal 2013 expected earnings, are just below long-term average valuations and are not very expensive. Nor are they very cheap. This limits the downside. Coupled with good FII (foreign institutional investor) flows, it has provided downside support to the markets.

However, due to lack of any positive triggers, continued macroeconomic weakness and absence of earnings upgrades in sight, markets are unable to move up sharply as well.

Talking of macro-economy, when do you see investment cycle reviving?
Macroeconomic conditions continue to remain challenging. GDP growth is slowing down, while interest rates continue to remain high. High fiscal deficit and current account deficit are putting pressure on private sector investment and currency. While inflation has moderated and interest rates have peaked, there is still some time before we see meaningful reduction in interest rates. Hence, (there is still some time before we see meaningful) pick-up in investment activity. Policy action is required to revive investments in infrastructure and corporate capex. This is a very important factor for the economy and markets.

The markets have been mainly driven by huge FII inflows last quarter. How are the global factors which may impact Indian markets looking like?
FII flows have been and are a key driver of equity market performance. Globally, US and European Union (EU) economies have averted major crises for now but have yet to address long-term structural growth issues. The US and the EU have infused huge amounts of liquidity which is moving into various risk assets globally and will continue to flow in high growth economies.

China, on the other hand, is moving on a path of orderly growth slowdown. It’s moving away from being an export- and infrastructure investment-driven economy to domestic consumption-driven growth. As a result, Indian markets have received close to $9 billion in the year till date. However, going forward, more clarity is required on the General Anti Avoidance Rule (GAAR) and taxation of FIIs before we can see more flows coming in.

In the next three to six months, which sectors would you bet on?
We continue to remain positive on IT, the private sector banks and automobile sectors. The IT sector has underperformed over the last quarter due to lower growth concerns for the companies. Valuations in the sector are now quite reasonable. Deal wins and business flow continue to remain healthy. Given the weak domestic macro-economy and pressure on the Indian rupee, we are positive on the sector.

Private sector banks continue to perform well, growing their balance sheets faster than the industry; they have robust asset quality with stable to expanding margins. We continue to remain positive on the space given its steady, high-quality earnings growth. We like select pockets in the automobile space: we are positive on the four-wheeler space, companies with strong balance sheets, which are good consumption plays and would benefit from a rate cycle reversal.

Are you avoiding any sectors at this point in time?
We are negative on two-wheelers as competition is heating up in the sector along with slowdown in overall growth. We are also negative on pockets of infra and power sectors which are dependent upon policy action by the government.

What could be the major trigger for equity markets in the coming months?
Given concerns on global growth, a significant correction in crude oil prices will be the single biggest trigger for the Indian economy and markets going forward.