A more proactive government and some level of fiscal discipline are needed to sustain the current rally, says Suresh Mahadevan, managing director and head of equities, UBS Securities (India).
We saw a great rally right at the start of the year. Did you see this coming?
It was certainly not expected. We ended last year on a reasonably pessimistic note. Most of the bad news was still there. The government's inability to push through reforms, weakening economic growth outlook, negative earnings momentum, the rupee or inflation numbers -- anything you looked at was very negative.
It seems few things fell in place in the first few weeks of 2012. First, the rupee became a lot more stable and appreciated strongly from the 53 kind of levels. Second was the credit ratings upgrade by Moody's, which helped.
We also had the Prime Minister's meet with the chief executives of power companies. Of course, last week's credit policy was a positive outcome. It's clear the monetary cycle has turned. I don't expect inflation to rear it ugly head again immediately.
Do you expect the rally to sustain?
For this rally to sustain, we need to see a few things. First, we need to see a more proactive government, which we'll probably see after the elections. The election results will be important in the context of how strong the government can be in terms of pushing reforms.
We need to see some level of fiscal discipline. The big picture is India poses fantastic opportunity with its great demographic. But the government needs to do something about it, like attracting foreign direct investment and putting up low-tech manufacturing to employ all the people going to come into the work force.
Then there are global events which play a critical role. Whether we like it or not, India is a high beta market. Any global event that triggers a risk-off kind of a move will affect us.
How do India's valuations look?
We are still at about 12 times earnings. Though we are expensive from December levels, we are still below our historical averages. The reality is 2011-12 numbers are not going to be great and the market knows that.
For 2012-13, we are expecting the earnings per share of Nifty companies to be about 400. Next year should be better in terms of earnings growth. We are looking at about 13 per cent earnings growth.
What is your index target for the year?
Index-specific targets are irrelevant. It's time to focus on specific stocks. We can trade at 15 times, which is 6,000 on the Nifty. The market is always forward looking. So, if you are growing, you can take another 10-15 per cent upside.
Will India be able to attract more than its fair share of further foreign institutional investors flows?
The structural growth in India is likely to be strong over the next two decades. Even in the worst year, we will grow our economy at about seven per cent. Economic evolution will attract a lot of capital because there are lot of growth opportunities to be found in Indian stocks.
Also, there are very few growth spots left in emerging markets. India is certainly one of the few, along with Brazil, Russia, China, Indonesia and Africa.
What are the sectors and stocks you are positive on?
From a stock market perspective, 2011 was all about low beta and defensive names like ITC, Hindustan Unilever, TCS, Infosys and HDFC. I think 2012 will be risk-on. High-beta stocks like ICICI Bank, L&T, SBI and M&M will do well.
Typically, some sectors like banks and capital goods tend to do well, as a turn in the monetary cycle starts the investment cycle.
