The Hindu Business Line : ‘Market valuations look reasonable after correction’

The speculative froth that was being built up in many stocks is greatly reduced. Though we remain positive on the Indian markets over the medium term, we expect market volatility to continue in the short term.

MR MIHIR VORA, HEAD OF FUND MANAGEMENT (EQUITIES), HSBC ASSET MANAGEMENT

Kumar Shankar Roy

Srividhya Sivakumar

The recent market corrections can be viewed as a healthy reduction of excesses that were getting built in certain segments of the market, feels Mr Mihir Vora, Head of Fund Management (Equities), HSBC Asset Management. HSBC Asset Management India, the investment manager of HSBC Mutual Fund, manages net assets of over Rs 3,500 crore through its nine equity funds. In an interview with Business Line Mr Vora shares his views on a few sectors and on the macro concerns in the economy. Excerpts from the interview:

The recent market sell-off has seen significant decline in valuations across stocks and sectors. What is your view on the market? Is this the right time to call it a bottom?

Yes, valuations have become very reasonable after the correction and the speculative froth that was being built up in many stocks is greatly reduced. Hence, we remain positive on the Indian markets over the medium-term. However, in the short term, we expect market volatility to continue because of local and global uncertainties on inflation and growth.

Locally, the impact of the Budget and the Sixth Pay Commission on consumption (urban plus rural) is likely to start trickling down into the economy in the second half of this year and the next.

Thus, the second half may see a better investment environment. . We believe that GDP growth for 2008-09 may be in the 7-7.5 per cent range now as compared to the 7.5-8 per cent expected earlier. This is on account of inflationary fears and concerns of a global slowdown.

Which sectors do you think hold long-term potential from here on? Any specific sectors that you would avoid…

Broadly we believe that infrastructure-linked sectors and consumption-oriented sectors will continue to do well. This means in the medium term, we would be bullish on Engineering, Capital goods, Telecom, Housing Finance, FMCG, Cars, etc.

What would be your views on IT and real-estate? These sectors have recently suffered downgrades.

We significantly reduced exposure to IT last year but have gradually added over the last couple of months as valuations have become quite attractive. However, we are unlikely to be highly overweight on the sector as global growth concerns and currency issues may work against it in the shorter term.

We continue to be underweight on the real-estate sector.

The valuation gaps between large cap stocks and the mid- and small ones have widened considerably from the peak. What are your views on this market cap segment?

The mid and small-cap indices are down about 37 per cent and 44 per cent, respectively, from the highs. Valuations have become really attractive and we believe that over the medium term, these segments provide many more attractive investment opportunities compared to large-caps, albeit with much more volatility.

We recommend exposure to these segments over a period of time.

The latest numbers on IIP, GDP forecast and the earnings scorecard of corporates appear to be losing steam. Do you think an economic slowdown may be in the offing?

The numbers over the last few weeks have shown signs of some slowdown and we believe that against the earlier expectations of 7.5-8 per cent GDP growth for 2008-09, the expectations are now in the range of 7-7.5 per cent. However, if one were to look at the recent data, there may be some one-off items e.g. capital goods growth in January was abnormally low for a category that is not prone to sudden slowdowns.

Hence, the slowdown is unlikely to be as sharp as reflected by the fluctuations in the IIP numbers.

Has HSBC’s view on India as an emerging market changed in view of the slow growth expectations, prolonged correction and concerns linked to US recession?

Not at all. If one were to look at investments with a medium to longer-term perspective, the correction can be considered as a healthy reduction of excesses that were getting built in certain segments of the market.

The Indian economy has multiple triggers and buffers to counter any potential global slowdown, as a large part of the Indian growth story is driven by domestic factors, e.g. consumption, infrastructure, services, and agriculture.

In case of a global slowdown, commodity prices may come down, reducing inflationary pressures.

Also, global (and ultimately local) interest rates would also come down (e.g. the US Fed has already cut short term rates aggressively) and aid growth. Given an improvement of the fiscal situation, there is room for Government policy (fiscal, monetary) to counterbalance the impact of any sharp slowdown.

High levels of domestic savings, healthy forex reserves, foreign investments and remittances from overseas Indians will also provide support to the economy.

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