Economy seems to have bottomed out, see 5.6% GDP growth next year: K Ramanathan

In an interview with ET Now, K Ramanathan, CIO, ING Investment Management, shares his views on the market and certain sectors. Excerpts:
ET Now: Seems like the market is going to be pretty much in a wait and watch mode up until December 8.

K Ramanathan: Yes, that is right. Clearly in the short term, the market will be driven by the elections results. The market as of now is expecting a three state win for the BJP. If that does come through, then possibly in the short term, there could be a knee-jerk rally, but clearly the state election should not be considered as a full harbinger for the next year elections. There is still six months to go. You have other issues like Fed taper and the RBI policy on December 19 to consider.

ET Now: The GDP data was not as bad as many feared and we have had a very pleasant surprise on the current account deficit front. Are the macros now looking at a lot better and do you think over the next three-four months can we expect them getting a little more cleaned up?

K Ramanathan: Yes, that is our expectation. Clearly the improvement in GDP number from 4.4% to 4.8% indicates that the economy at least has bottomed out. One can debate on the strength of the recovery, but the fact remains that we are seeing a recovery. Our estimate of the next year GDP growth is close to 5.6%. So we are building in a recovery.

ET Now: What is it that you are liking out of the metals universe because increasingly one has seen traction being built in all the stocks from the metals universe?

K Ramanathan: We are overweight on Tata Steel. Clearly the cycle in Europe has bottomed out. Productivity improvements have also happened in the company. The EBITDA per tonne has improved on a quarter on quarter basis. Tata Steel is focusing on improving their EBITDA per tonne and that is reflecting in the results. Apart from this, we are not very positive on the other names in the metal space.

ET Now: What about IT? Would you continue to be overweight on IT as well?

K Ramanathan: Yes, we continue to be overweight and nothing much has changed. The management guidance continues to be positive. While furloughs will create some amount of disappointment in this quarter, one should not invest in these stocks on a quarter on quarter basis. Visibility is there and valuations are reasonable. Especially for midcaps which are trading at around 10 to 12 times, while they have run up by 30-35% given the earnings growth between 15 and 20% on an annual basis, there is still scope for some more upside. On the whole we are overweight on the IT space and overweight on midcaps.

ET Now: What is it that you are liking from the pharma space?

K Ramanathan: We are neutral on this space as of now. Although on pharma as a sector, it is difficult to give an overall trend. It is more stock-specific in nature. Here again, there are good names in the midcaps which are trading at around 10 to 14 times while the large caps are trading anywhere between 20 and 24, depending on which name you are talking about based on FY-15 EPS numbers. So while the near-term upside might be limited in the large cap space, there are good bottom up picks in the midcap space.

ET Now: What about banking stocks and what do you expect from the RBI in the December policy? Would it be fair to assume that the market is now pricing in another 0.25% rate hike?

K Ramanathan: I do expect a final 25 basis point rate hike taking the repo rate to 8% from 7.75%. I continue to maintain that RBI will have tight liquidity over the next few quarters to put a lid on inflation. There are signs that inflation is easing out, not on the food items but on the core CPI front. Core CPI has come off from 8.5% to 8.1%. So there is light at the end of the tunnel on the inflation side. Hopefully, the good monsoon will get further reflected in good harvest, which is already getting reflected in the good agricultural GDP growth in this quarter. It should get reflected in the next quarter also and that should bring the prices down. Hopefully, given the fact that there needs to be a balance between growth and inflation, RBI will realise that this will be the last 25 basis points and stay put going forward.

ET Now: What is it that you have made of the auto sales figures this time around and the kind of petering down in the trend that we have seen? While it has been on expected lines, does it seem like this is just one-off blip and they would be back on the road to recovery come next month?

K Ramanathan: The feedback from the management clearly indicates there is continued weakness in this space, though in the two wheeler space Hero Honda is doing better than Bajaj Auto more in terms of Bajaj sales being more skewed towards the urban market than Hero. So clearly, the rural areas still have some steam left to go, though the pace of growth has declined quite a bit. Year to date still, the volume numbers are growing at around 2% to 4% as against 8% to 9% last year and the traction is yet to come, though the festive season has been reasonably okay. In case of four wheelers, we are negative on the space. These are high value items. Postponement of decision is very much possible. So you could have volatility in volume growth, except for names like Maruti. In the four wheeler space, we are overweight Tata Motors and underweight on all the other stocks.