The outlook for equities is positive because money has just begun flowing into financial assets. This is due to falling inflation and high interest rates, says Ritesh Jain, CIO, Tata Asset Management.

In the light of weak corporate performance in the September quarter, have you downgraded your Sensex earning estimates for FY15?

September quarter performance for India Inc has not been in line with expectations. For FY16, we were looking at EPS of about 1,800 for the Sensex. But we would like to wait for some more time for the investment cycle to pick up and not hazard a guess at this point in time. When markets are in love with a leader, they tend to give him more time to perform. When Shinzo Abe and Joko Widodo took over as Japanese Prime Minister and Indonesian President, respectively, markets rallied on hopes of economic reforms. There is a lot of expectation from the Modi-led Government — we will have to give them some more time to deliver.

What is your take on the market valuations after the sharp rally over the last 15 months?

The market currently trades about 16 times FY16. The previous government was not able to kick-start the investment cycle. But there is hope that the new Government will be able to do that, because the next leg of job creation will happen only then. But it has not happened yet. The credit growth is still in single digit. However, if you ask me whether we are in a bubble, I don’t think so. The peak valuation for the market was 24 times. Had the capex cycle started, I would have been very comfortable. For Sensex valuation to get re-rated from 16 to 20-plus, the investment cycle will have to pick up.

But the growth pace was much stronger when the market traded at 24 times. Given the current pace, is 16 times not expensive?

Yes, the growth pace is much slower now. But India, unlike the other G20 countries, has a lot of headroom to cut rates. Had our interest rate been zero per cent, then I would have been worried

But the rate cutting cycle can pave the way for re-rating. The lower the inflation expectation, the higher and more sustainable will be the re-rating. Earnings growth may be back-ended, because the Government and corporate India do not have all the money and the RBI is not cutting rates.

But some one will have to write a cheque; that is where I think our Prime Minister is doing a great job. He’s spending more time outside the country, because the money has to come from abroad. Once we get the money and regulatory issues are sorted, then the growth momentum can be very fast.

Which themes appeal to you currently?

We are overweight on IT, pharma, auto ancillaries, private banks, NBFCs with niche businesses and cement; IT and pharma for their good growth visibility, of course, IT is more reasonable in terms of valuation compared with pharma.

We like private banks as they continue to gain share from their public sector peers. Likewise, auto ancillaries, which specialise in small components and are difficult to replicate, appear interesting. We are underweight on oil marketing companies and, of course, FMCG, purely because of their valuation.

Are you increasing cash levels?

No, I think we are not really worried about time correction, say, over the next three-six months, because, over a three-five-year period, equities are set to outperform. This is because we see that the flow of retail money from real assets to financial assets has just started.

After a long time, real interest rates are positive due to the sharp fall in inflation.

This is one of the reasons why we think the RBI may not be in a hurry to cut rates. Indians are warming up to financial assets, which is also evident from the slowing demand for real assets; NHB’s residex index, for instance, has flattened now.

Likewise, gold has not given great returns. The gap between the 10 year G-Sec and WPI is widening.

Your take on interest rates.

We expect interest rate cuts within the next six months. Policy rates have limited impact on bank lending and borrowing rates. G-Sec yields are already falling.

And unlike two years back, with the fall in inflation, people are now willing to put money into bank FDs. SBI has already cut its deposit rates. If it can get deposits at 6 per cent, it may not want to keep the borrowing rates high at 10 per cent. We believe that the RBI would like to see the fiscal outturn for CY14, January CPI and the fiscal deficit in the next Budget before taking a decisive call.

Hence, a rate cut before February looks slightly unlikely. On a one-year basis, 10-year G-Sec yields may fall by 75 to 100 basis points.

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