It is interesting how quickly sentiments turned post Chidambaram’s appointment: Espirito

Nick Paulson-Ellis, Country Head of research and brokerage company Espirito Santo Securities, is cautiously optimistic on the Indian equity markets. The head of the Portuguese broking firm, which is gearing up to launch its first investment bank in the country in March, feels that the RBI has been backward looking with a rear-view approach to monetary policy which is perhaps overly focused on inflation.

How has the global investor sentiment changed towards the ‘India Story’?

Much of the last two years has been a tricky period in terms of both financial services and India generally with perception of policy paralysis and steadily declining GDP rate. But it is interesting how quickly sentiments turned post Chidambaram’s appointment as Finance Minister and the reforms initiated by him. The markets turned around and the general sentiment towards India also improved. In 2010, Indian policy makers and corporate India believed in the inevitability of the Indian growth story though in reality no country develops unhindered. India still faces many challenges and the last couple of years have been a reminder of that. One hopes that the progress through the reform process is maintained as there are still issues to be addressed particularly in infrastructure and power sector. The outlook is interesting till the run up to the elections in 2014, with lots of moving paths for the investors.

How do you view the RBI’s latest stance on the monetary policy of maintaining a status quo on rate cuts?

I think the RBI has been backward looking with a rear-view approach to monetary policy which is perhaps overly focused on inflation. Inflation has been stubbornly high but there are indications that suggest that it would moderate next year but not to the RBI’s comfort level. The RBI’s comfort level looks low now relative to what appears to be India’s structural inflation. I think the fact that the rate cut cycle has not really happened so far and has been below expectations is a negative as we were expecting a 50 bps cut over the last quarter. We hope to see another 25-50 bps cut in January. It won’t be a very deep rate cut cycle but at least it will start. It looks like the inflation risks are contained and there is a window in the first few quarters in this calendar year where inflation should come off and there is an opportunity there.

What could be the biggest risk or challenge to the markets going forward?

For all the attention being given to the coal problem and the project approval problem in terms of project cancellations and new project announcements – all the leading indicators of the infrastructure sector are not turning up. But the expectation is that perhaps with the combination of PMO’s attention to the sector and the rate cut cycle starting, the investment cycle would turn.

This for me is the biggest risk for this year as people are factoring in the turn of the investment cycle while all the leading indicators are not there. We need to be careful. It (revival of the investment cycle) could well happen 9-12 months later than expected as these things take time.

What would kick-start the investment cycle you mentioned above?

It needs coal linkage problems to be partially resolved, forest and environmental clearances to happen and project approvals to come through to unblock the money tied up in these projects. All the associated problems in the banking system around volatility in asset quality of the PSU banks also need to be addressed.

What is your outlook for Indian markets in 2013?

We are cautiously optimistic. The world seems to be very comfortable with risk. It is the sixth year since the economic crisis surfaced and people have got used to a different environment for investing now. The focus would be on domestic markets rather than global events. This was seen recently in the US fiscal cliff which hasn’t really been a driver for the Indian markets. Less focus on Eurozone and more focus shifting to India’s own recovery is our outlook.

One of the unusual characteristics of India is its robust corporate sector with opportunities irrespective of government inaction. Some of these maybe priced up but we still see value in them and could see a 15-20 per cent upside in the overall market in 2013. But this won’t be linear and will be marked with periods of volatility. Also, a lot more focus would be on good quality mid-cap companies offering more value than large caps.

manisha.jha@thehindu.co.in

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