Stock market faces strong headwinds ahead: Sandesh Kirkire

Kotak Mutual Fund CEO Sandesh Kirkire speaks on equities, FII investments, outlook for the Indian economy, debt market and the mutual fund industry in this interview. Excerpts:
What is your outlook on the equity markets in the near to medium term?

Indian equities market is currently operating within a broad trading range, and is displaying sharp bouts of volatility with occasional surges of momentum play. The one-year forward P/E is estimated at around 15.5x and seems fairly valued vis-à-vis the long-term historical average.

Having said that, domestic markets face strong headwinds from a combination of issues, namely high inflation, hawkish monetary policy regime, slackening industrial growth, rising crude oil price, widening BoP deficit and political & reforms impasse.

These issues portend serious concern for the economy and the markets in the near term. However, the consuming population and rising income levels provide ample demand cushion for the long-term growth trajectory to remain intact.

How do you see FIIs playing out in the near future?

FII inflows in Q1-2011 were estimated at US$ -519 mn, when compared to net flows of US$ 4.5 bn in Q1-2010. This drastic change may be attributable to the improved economic performance in the US, which may have led to a change in the allocation pattern by institutional investors globally. Moreover, the rising inflationary pressure in the emerging economies, including India, too has increased the risk premium significantly for these investors.

Nonetheless, we believe that, as India continues to inch closer to outperforming the Chinese growth rate, it would be increasingly difficult for the global investors to avoid India. Therefore, while in the near-term FII inflows may have turned negative, the long-term trend continues to be bullish.

How do you see the Indian economy reacting to the cataclysmic events in Japan?

Indian economy may not be affected directly by disaster in Japan. Having said that, investor sentiments globally have been marred by these events. More importantly, there would be an increased resistance to nuclear energy sector, both in India and abroad. This may lead to incremental dependence on hydrocarbons, which may further drive up the oil & gas prices

How do you foresee key commodities & currencies shaping out globally?

The dollar, crude and gold, all three share a relationship amongst themselves. With the US rating under pressure, dollar should have been far more bearish than it is today, but for our rising current account deficit. Over the medium to long-term, the rupee should strengthen for sure.

The commodity basket prices are driven more by the financial markets rather than demand and supply. Otherwise how can oil move by over 100% since the financial crisis, while the global oil demand has risen by less than 2%. While rise in crude oil has a direct impact on economic growth, the rise in gold does not do so.

My take is, the crude futures market continues to test the demand growth, and the moment the demand starts slipping, the crude futures may also correct. Therefore, I am not worried about the speculation of an oil shock, which can happen only in case of an increased geopolitical turbulence. In case of gold, the price rise is mainly because of a hedge to the reserve currency, and the bullish undertone may continue until the US economic recovery is in sight.

What is your view on the present debt market environment?

Given the rising thrust of inflation from fuel and primary goods sector, RBI is expected to maintain a predominantly hawkish stance with respect to the key interest rates. We expect the RBI to hike rates in response to the inflation number in May 2011. That would take the repos rate to 7%. From there on, we may see at best 1 or 2 more rate hikes in 2011, since further incremental rate hikes would be data driven.

However, the rate stance by the central banker may undergo a change, were the geo-political factors affecting the crude oil prices, to mollify. In addition, the concurrently benign borrowing programme by RBI seems to be aimed at enabling the commercial sector to manage their debt capital needs in a relatively comfortable fashion.

What is your view on various sectors going forward?

We remain largely bullish on the Pharma, IT and Banking sector. We believe that the relative interest-rate passivity of the Pharma and the IT sectors cushions them to capital cost pressure. Additionally, Pharma and IT also stand to benefit from expanding demand in the US economy. Correspondingly, Banking sector too is expected to benefit from the rising credit growth in the economy.

On the other hand, auto, oil marketing, and real estate sector may require discreet approach due issues like high inflation, rising interest rates, and steepening prices of hydrocarbon fuels.

How do you see the Mutual Fund industry panning out in the near to medium term?

We remain highly optimistic on the growth opportunities available within the domestic mutual funds industry, and believe that it would mature in tandem with the nominal growth of the economy. Mutual funds are the among the cheapest investment options available for the retail investors to access capital markets. The focus therefore is on increasing retail penetration through the SIP route.

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