In an exclusive interview to NDTV’s Prashant Nair, Nilesh Shah, MD & CEO of Envision Capital, said Indian equity markets seem to be in a consolidation phase and it is quite likely that the markets will trade broadly between 4800 and 5200. He said the positive view on the markets is coming more from global macros rather than domestic micros.
NDTV: What’s your opinion about markets?
Shah: Indian equity markets seem to be in a consolidation phase. Phases of consolidation are typically time-consuming where markets move in a very narrow range. We are in a situation where the valuations are neither particularly cheap nor expensive. It is quite likely that this market will trade broadly between 4800 and 5200.
A breakout or breakdown from these levels will however be very swift and this will depend upon several variables that will emerge over the next two to three months. These variables could be dollar movement, global risk appetite, liquidity flow into markets, Budget expectations and the new reforms policy. But the basic point here is that by and large the easy money is behind us and markets will face challenging times over the next few quarters.
NDTV: If you have to put numbers, what would that be for Nifty? If markets are not cheaper then are they likely to get cheaper with significant dip?
Shah: Yes, the markets will get a little more expensive before they get significantly cheaper. That’s purely because of the fact that the benign liquidity environment across the globe is likely to sustain for a while. I think it suits the US policy markers to have a weaker dollar. As long as we have a weak dollar, you continue to have a benign liquidity environment, and in this environment, relatively riskier assets like emerging market equities continue to outperform.
The positive view on the markets is coming more from the global macros rather than domestic micros. For domestic micros to play out very well, you have to take a peek into next year’s earnings and see whether we can get into double digit revenue growth which was absent in the last several quarters. While we have seen strong earnings growth for our companies because of lower interest costs and excise duty benefits, we are yet to see any meaningful improvement in the revenue growth. And if revenue growth gets into plus 10 per cent range, we’ll see a meaningful rerating of Indian equities.
NDTV: So, what’s the range of markets going to be?
Shah: On the upside the markets could see levels of 5500 and there is nothing which can probably even stop that. But yes, the months of January and February become critical for markets because of the conventional FII allocation season and Budget expectations. Budget is going to be critical from three perspectives which are stimulus withdrawal, GST roadmap, and the direct tax code (expected to be introduced in 2011). These three catalysts we need to watch out for very carefully in the Budget and they could decide the course of markets for the calendar year 2010.
NDTV: We believe you are bullish on IT and consumers’ goods segment right now?
Shah: Yes, the IT sector has the best visibility and it is direct proxy on recovery in the US. Spending by corporate America is going to pick up and more importantly Indian IT companies have demonstrated very good ability to manage slowdown and downturns. So, clearly they have now got a time tested robust business model which is playing out even in bad times and in relatively good times it will play out more. The consumer goods space will continue to have 15-20 per cent growth and they do not need to dilute equity to grow at that pace. Thus both these sectors have potential to outperform others.
NDTV: You are underweight on infrastructure but reading from your sectoral recommendations, you seem to be sticking with defensives?
Shah: Infrastructure continues to be a significant opportunity from the macro perspective and there is no denying of fact that the spending on infrastructure is targeted to increase significantly as a percentage of GDP and there is a lot of liquidity which will facilitate infrastructure creation. But what is good for country may not good for financial investors. In the short to medium term our sense is that infrastructure will underperform given that a lot of infra firms have been raising a lot of capital. Basically conversions of order books into actual projects is not really happening at the desired pace, so in our view they will get into consolidation from their financial point of view. But it would be a while before they get back to their ROEs which they were sustaining two years back and once that happens they will get into outperforming mode. But in the intervening period they have the potential to underperform.