Contributed by: Ishwar Chidambaram, CFA
In keeping with its hallowed tradition, IAIP organized its 6th Annual Forecast event at the iconic International Convention Hall at the BSE on 1st April 2014. The event was moderated by Saurav Mishra, CFA. The program started off with the President’s address, delivered by Jayesh Gandhi, CFA, President IAIP. He gave an overview of the IAIP and described the context of the forecast event. The next address was delivered by V. Balasubramaniam, Chief Business Officer, BSE, who highlighted the transformational changes at the BSE. BSE has entered into JVs with S&P Dow Jones, as well as having data sharing agreements with Deutsche Borse. It has captured dominant market share (80-90%) in SMEs and MF platforms, as well as drastically reducing response time in the new trading system. This was followed by the much-awaited panel discussion. The luminaries included Ananth Narayan, Ajit Dayal, Jyoti Jaipuria and Sunil Singhania, CFA. The panel discussion was moderated by Vivek Law, from Bloomberg Television. The discussion was wide-ranging and covered the entire spectrum of topics from General Elections to FII fund flows and relative attractiveness of various asset classes. Next, the names of the winners of the FY14 Forecast Contest were announced. The event was concluded with a Vote of Thanks, followed by networking.
Following are the highlights of the panel discussion:
Ajit Dayal, Director, Quantum Advisors Pvt. Ltd.
Recent market rally is entirely sentiment-driven, with little basis in fact. For example, there is no evidence of capital expenditures by companies, who are content to hoard cash rather than investing to build new capacity. The rally is entirely driven by change of sentiment among stock market speculators. In January and February 2014, FII inflows were largely absent. Only domestic speculators invested up to $300 mn in Indian equities. FIIs entered the scene in March. Retail investors are largely driven out of the market and on the sidelines. Any new government must ease up rules on Taxation and Investment. Equities are fantastic investment, but the investment rules are biased against retail investors. ETFs are not viable in India, as index constituents keep changing, leading to huge transactions costs for rebalancing. Capital Goods sector will outperform if NDA coalition comes to power. He is overweight on capital goods since 2012 and is extremely bullish on this sector.
Ananth Narayan G., RH-Financial Markets & Co-Head of Wholesale Banking, South Asia, Standard Chartered Bank
The strongest evidence of recovery in sentiment has been seen in FX markets, wherein the INR has appreciated 15% from its all time lows against the USD. We have borrowed our way into stability, as the Current Account Deficit is funded mainly by “hot money”. This is undesirable as these flows are volatile and will again exert downward pressure on the rupee as they reverse. Any new government must first act to free up stuck investments in Infrastructure projects which will channelize fresh EBITDA inflows into domestic companies, reducing corporate leverage. New infrastructure investments will also eliminate supply side constraints, which is the only way to tackle rampant inflation. Equities are a volatile investment. Risk adjusted return on Bonds will be attractive, in the region of 9-9.5% and will begin to outperform in the current fiscal. India is currently placed well below its Production Possibilities Frontier hence a major thrust is needed on policy and reforms front to achieve higher levels of growth.
Jyotivardhan Jaipuria, MD and Head of Research, DSP Merrill Lynch Ltd.
Indian equity markets have not run ahead of fundamentals. Expectations are very high, but markets are not expensively priced. We are in a sustained pre-election rally, with stocks rising 16% over the past 6 months. He said that such market behavior is fairly typical and that markets tend to rise post-elections as well. The new government must focus on removing bottlenecks in FDI. It will take at least 12 to 18 months to ease them. GST laws must be amended. Risk appetite of the investor is paramount in deciding exposure to equities.
Sunil Singhania, CFA, CIO-Equity Investments, Reliance Mutual Fund
Indian equity indices have risen by only 10% over the past 12 months. Markets are attractively priced, with a very reasonable P/E multiple. Markets have shown great resilience, as seen by their response to US Fed tapering. Despite 3 successive tapers of $10 mn each, bond yields have not risen significantly. If India is a $5 trillion economy, then it is reasonable to expect a $5 trillion equity market capitalization, and -by that yardstick- markets are undervalued at present levels. Pharmaceuticals sector has yielded returns in excess of 40-50%, hence it is a misnomer to term this sector as “Defensive”. Same is the case with IT. He concurred that ETFs incur frequent rebalancing costs, and is a formidable proponent of actively managed portfolios.
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