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Paul Armstrong
CIO, ING Yysya Life Insurance

India continues to be an attractive market, and currently, from an international standpoint, it is not as expensive as it was in the past. However, we must remember that expectations of economic growth and profits have come down in the country, which probably explains why it is not trading at a premium to the rest of the world. So, is India a compelling market? The answer is certainly ‘no’, though, it is not expensive any more either.

There have been many developments in the global markets. It needs to be mentioned here that the downgrade of the US by S&P is a non-event. The difference between the AAA and AA ratings, which indicate a company’s or a country’s ability to repay debt, is tiny. Thus, in effect, the downgrade is insignificant. What is really important is that the debt in the US will grow by 50 per cent in the next 10 years. In my opinion, the situation in the European region is more dangerous than it is in a downgraded USA.

On the Indian scene, the earnings in the first quarter of the present fiscal are below the estimates. The results cannot be said to have been altogether bad, as the current quarter has seen a 20 per cent topline growth on a YoY basis. However, the issue that needs to be addressed is, whether companies can sustain their margins in the midst of rising input costs—including interest rates, commodity prices and labour costs. Interest rates have been higher for the last couple of years, prices of commodities across the spectrum have gone up and wage bills are also on the higher side. Thus, it is evident that these are the three major areas where corporate India’s profits face a challenge. We have already seen analyst downgrades, and there are chances of further downgrades. From the market perspective, we have seen multiples standing at 12 to 13x for FY13, which are lesser than what it has traded at in the past.

At present, there is much talk about interest rates. Even in the last policy statement, the RBI has made a hawkish comment about addressing inflation on a priority basis. At that point, the central bank was not as concerned about global factors as it is now. Of late, it has said that the series of interest rate hikes that it has made have started impacting the demand, and hence inflation is being toned down slightly. We believe that the short-term interest rates have already peaked out, and we are not far away on the long-term interest rates either. Going forward, the quality of earnings of India Inc. will improve, and the realisations will be better than in any other country in the world. This will positively impact domestic investors, and also result in higher FII flow, as and when they see that India has started addressing issues on the macro front appropriately. The peaking of the interest rates may also act as a trigger.