Q&A: Bharat Iyer, JPMorgan

'Indian markets unlikely to slip below Oct lows'
Mehul Shah & Ashish Rukhaiyar
Mumbai, 4 November 2011

A meaningful correction in global oil prices and/or progress on key reforms would be important re-rating triggers for the Indian stock market, says Bharat Iyer, executive director and the head of India equity research at JPMorgan. He says interest in Indian equities among foreign investors remains keen. Edited excerpts from an interview with Mehul Shah and Ashish Rukhaiyar:

We have seen a rebound in global markets after leaders announced a deal to contain the euro zone debt crisis. In the US, Q3 GDP numbers have reduced fears of a double-dip recession. Is the rally sustainable?
There was extreme pessimism regarding US and Chinese growth, and the European debt crisis. All it took were modest improvements in the US and China economic outlook and ambiguous plans out of Europe to drive markets higher. Where do we go from here? Sideways, most likely, with more volatility to come. Considerable work remains to achieve a resolution on the credit crises in Europe and the outlook for global growth remains patchy.

Do you expect Indian markets to hold their October lows in the near future? What are the major risks for the market in the next three to six months?
It would take a lot of bad news for the Indian markets to go below the October lows. This would, in all probability, have to be due to a global shock. From a local perspective, the Reserve Bank signalling a pause to monetary tightening should put a floor to market valuations. A meaningful correction in global oil prices and/or progress on key reforms would be key re-rating triggers to look forward to.

FII (foreign institutional investor) flows have been moderate so far this year. How are they viewing the Indian market?
We believe FIIs have gradually raised their India stance from Underweight early in the year to Neutral at present. Interest levels in Indian equities remain keen, particularly given the uncertain global growth outlook and the correction in commodity prices.

What’s your view on the corporate results for the quarter ended September 30? Could we expect further earnings’ downgrades for the Sensex/Nifty in 2011-12?
Halfway into the Q2 reporting season, it has been a so-far-so-good case. On aggregate, corporate earnings show about 12 per cent year-over-year (yoy) growth, versus our expectations of a 10 per cent yoy growth for the universe. Companies with better performance typically report early in the season and we could see signs of stress from those announcing later.
On balance, current consensus expectations of a 16 per cent earnings growth for FY12 do appear optimistic. Growth of 10-12 per cent would be a reasonably good outcome in the backdrop of the stresses the corporate sector is subject to.

RBI has indicated a pause in its monetary tightening cycle. Has there been any change in your sectoral preferences after RBI’s announcement?
Going into the policy review, we were recommending an overweight stance on financials. The slowdown in growth has become meaningful in the recent past and with inflation showing signs of peaking, we anticipated RBI was nearing the end of the tightening cycle.

Which sectors are you overweight and underweight at present?
We prefer local sectors to global cyclicals at this stage. The outlook for local growth is much better and policy makers in India have more ammunition as compared to counterparts in the developed world.
Within local sectors, early stage cyclicals – particularly financials — appear appealing. Valuations are appealing and inflation rolling over or an end to monetary tightening is a trigger for outperformance. Near-term data points on discretionary spending could be weak and valuations are not cheap, so we await a better entry point in this space. Industrials are cheap, but lack catalysts to outperform, unless we see signs of policy action.
We are underweight on global sectors. Bottom-up, there are interesting opportunities in IT services, healthcare and metals.