Appropriate level for Nifty is 10,500 pts: Maybank Kim Eng Securities CEO

The sliding rupee, concerns regarding know your customer (KYC) for foreign portfolio investors (FPI) and rising crude oil prices have kept the markets choppy last week. JIGAR SHAH, chief executive officer, Maybank Kim Eng Securities, tells Puneet Wadhwa that though India could fare better on the global trade war front, oil price rise is a risk.  Hence, the pressure on currency – albeit gradual – might continue. Edited excerpts:

The Nifty50 is much higher than your earlier estimate of 11,200. What is the outlook? 

 The Nifty is at an all-time high and could continue to be in this zone. The risk to this is a retreat in the bull run in the US  percolating down to emerging markets (EM). The longest US bull run is continuing despite the winding down of quantitative easing (QE), rate increases and signs of an all-out trade war. Local factors are fiscal and current account deficit, inflation, interest rates and elections. 

Earnings have improved  but do not inspire the confidence of sustainably rising at 15–20 per cent per annum in the backdrop of  banking sector issues, leaving the markets vulnerable. The appropriate level for Nifty is 10,500. 

Are fears of currency, trade war and oil discounted?

India's historical premium to EM is due to its unique companies and relatively better return on equities (ROEs) than EM peers. The consumption story remains solid. In the trade war, India is insulated as it’s not a global exporter. Rising oil prices risk is still there. Hence, currency pressure — albeit gradual — might continue. 

How are foreign institutional investors (FIIs) looking at economic data amid sliding rupee and rising oil prices? 

FIIs are taking a long-term view. The rupee depreciation is not as scary as in 2013 and the rising oil prices would cause some portfolio reshuffle, but not major exits. More inflows depend on GDP/earnings recovery, the management of fiscal and current account deficit, global interest rates and developing election scenario. Sebi is reviewing the issue raised by FPIs regarding KYC and things should settle down.  

Is it a good time to buy mid- and small-cap stocks?

There cannot be any perfect timing, but given the correction in mid- and small-caps, there are some opportunities for the medium-to-long term on a bottom-up basis. Within our coverage, private banks/NBFCs (Edelweiss, JM Financial, Capital First, YES Bank, Federal Bank), data/digital (Sterlite Tech), consumer (Coffee Day Enterprises), software/tech (Take Solutions), media & entertainment (PVR, Inox Leisure,  Jagran, DB Corp), industrials (Inox Wind, Allcargo Logistics, PTC), cement (Dalmia Bharat), city gas ( Mahanagar Gas) are quite promising at these levels. Among the large-caps, we like HCL Tech, Tata Motors, Mahindra &  Mahindra, Bajaj Auto, Ultratech, Powergrid, Axis Bank and ICICI Bank.

And in terms of sectors?

Key overweight sectors are private banks and financiers, auto, media/entertainment, cement and software. Underweight are state-owned banks and financiers, industrials and telecom.

September 2018 marks the 10th anniversary of the global financial crisis (GFC). 

Have the financial markets learnt any lessons? 

It is the nature of the markets to move in boom-bust cycles and some new reason would come out when the current bull-run ends. The GFC was one in many decades event leading to ultra-low interest rates for an extended period causing asset bubble, manifested now in several internet stocks trading at esoteric valuation forcing a change in the structure of some industries and driving consolidation. Lessons are not learnt enough in corporate governance and executive compensation. 

Do you expect another crisis of similar magnitude?

It is difficult to predict a large-scale crisis, but corporate greed combined with the animal spirit of institutions is a lethal combination to produce such an event. Some big names going bust could have a domino effect like in 2000. Similarly, overleveraged countries could cause systemic failure somewhat like the current crisis in Turkey, but these reasons are not too big. A new dimension to the crisis could come from the behaviour of a new class of highly authoritarian world leaders causing a total reversal of globalisation.