As the global markets, particularly Asian markets, grapple with the impact of the roll back of the US stimulus, there is concern among investors here as to what would be its long-term effect on Indian markets.

This is understandable since the market, fed on a diet of easy liquidity, had rallied despite weak economic performance. A slew of factors, such as domestic political uncertainty, high inflation and interest rates, and concern over slowing Chinese economy have further added to investors’ apprehensions as to where the Indian equity market will head in the near-term.

In an interview to Business Line , Motilal Oswal, CMD, Motilal Oswal Financial Services, Mumbai, shares his perception on the markets and the issues that would have an impact on the direction it would take.

Excerpts:

The US taper has come to stay and it may gain pace in the coming months. How much do you expect this to impact the Indian markets?

We have already seen two tranches of $10-billion tapering each month. There are seven more to go. My sense is Asian emerging markets should be able to weather the effect of this withdrawal, much better than what we had seen during the 1997-98 Asian crises. The Indian fiscal situation and external situation are much better than what they were last year. We would see wobbles in our markets but I don’t think it would be anything catastrophic.

Is a stronger US economy better than a huge dollar flow for Indian markets? If so why?

The strengthening of the US dollar against the Indian rupee coupled with pick up in US growth augured well for Indian exports but has negative connotations for Indian imports.

This would work favourably for India’s current account situation which should be positive for Indian stocks. Added to that are cheap valuations of Indian markets which should support them at current levels. Markets are guided more by fundamentals and growth than by liquidity. If there is good growth, you will always find buyers. I don’t think there will be a dire squeeze in liquidity due to tapering in our country.

Do you think companies with high FII exposure will be vulnerable to large-scale exodus by FIIs? What should investors in these stocks do?

I have always believed that stock prices are only guided by fundamentals and nothing else. It does not matter who is buying or selling. If something is attractive because of fundamentals and if FII selling makes them even more attractive, it presents all the more reason to buy them. My advise to investors is not to be misguided into thinking that just because FIIs are selling they should also sell.

Which are the sectors / companies that are likely to benefit by the US economy gaining strength?

It is quite obvious that with the US economy gaining strength our export-oriented sectors, such as IT and pharma, would be clear beneficiaries as they would be able to get more business from the US. Rupee depreciation vis-à-vis the US dollar due to tapering would only help that cause.

Will the Chinese economic slowdown affect sectors such as metals?

Yes. Commodities such as coal and steel are particularly vulnerable. I only remain positive on iron ore for 2014.

While the BSE S&P Sensex is trading at 20,300 levels, many of the Sensex stocks are nowhere near their earlier highs. Do you expect investors to shift back to these stocks when the economy rebounds?

Automobile and banking sectors are the leading indicators of an economy. If there is an uptick in the economy, these will be the first to pick up. Since stock markets are barometers of an economy, this will be reflected in market levels also.

IT, Pharma and FMCG are the three sectors that have been holding the Sensex. Will investor fancy for these sectors wane when the markets recover?

It is very unlikely to play out this way because growth outlook for these sectors remains very positive and valuations are not euphoric. Future growth in these sectors will take care of elevated valuations. I don’t think there is any case for cashing out of these sectors right now.

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