Elusive earnings recovery the biggest domestic risk for markets: Jaipuria

Jyotivardhan Jaipuria, MD, Veda Investment Managers, feels global risks bigger than domestic

With the markets scaling new highs, Jyotivardhan Jaipuria, founder and managing director of Veda Investment Managers, tells Puneet Wadhwa that he expects domestic/economy-related plays to do better than export-oriented sectors. Edited excerpts:

Where do you see the frontline benchmark indices a year ahead? 

Over a year, the market is likely to give a positive return that could be high single-digit or low double-digit. However, (in) the near term, the market can be volatile and we could see a correction and time consolidation. The markets look expensive compared to long term averages but are probably discounting a sharp earnings improvement cycle. 

What are the key risks and triggers?

An elusive earnings recovery cycle remains the biggest domestic risk. However, the bigger risks are global rather than domestic. The rally of nearly 18 per cent in markets year-to-date (YTP) is only slightly higher than that of MSCI emerging market index and a large part of the rally is global. A faster-than-expected reduction in the US Fed’s balance sheet or geopolitical factors can lead to time and price corrections at current valuations.

Which sectors and stocks would take the lead if markets move higher? 

Our long-term theme for the past two years has been that domestic sectors will do better than global sectors. We are not changing that. That’s because: (a) the rural India story is both a cyclical story, led by monsoons, and a structural story as measures by the government to help transform agriculture play out; (b) operating leverage in companies, as demand picks up, especially in select infrastructure/capital goods companies; (c) the move from unorganised to organised industry, led by moves like the goods and services tax (GST).

Your expectations from the June quarter results? 

We see GST impacting the June and September quarters. While we had a generally strong April and May, the last fortnight of June was marked by severe de-stocking, which will impact the current results season. We think we will again see low single-digit earnings growth this quarter. 

While the de-stocking should lead to a strong rebound in sales in the September quarter, near-term traders, especially small and medium enterprises, are not fully geared for GST, in terms of systems and processes. This could impact the September quarter, too, though we see things gradually normalising after that.

Will the government adopt populist measures given elections in 2019?

The government has been taking reform measures through the assembly election season, contrary to worries of politics taking precedence over economics. As we get into 2019, we could see some populist measures like the farm loan waiver spree we are witnessing and higher spending on rural India in the next budget. 

Have policy measures to address the high debt issue come too late?

There have been a series of measures by the Reserve Bank of India (RBI) to tackle the bad loan problem. This has finally culminated in the bankruptcy law. There could be teething problems in its implementation. But, in the long run, this is a sensible way to tackle companies that could be facing a structural problem in operations and where the likelihood of survival is low. This and the likelihood of more players in asset reconstruction business will offer a framework to tackle corporate issues.

How are you viewing macroeconomic numbers? Is there a case for a rate cut?

The twin deficits (budget and trade) are under control and the Indian macro seems to show no stress, with growth being the missing element. The monsoon seems above normal so far, both spread and quantity. In this backdrop, we think RBI will cut rates, though they are likely to be closely watching the impact of GST on product prices.

What is your advice to investors on the banking and software sectors?

We like the banking sector, which we think is a way to play the growth of the economy. Private sector banks are secular growth stories, where we have a mix of high quality consumer-oriented franchises, coupled with more corporate-centric banks which are cheaper today and provide a better leverage to a turn in the economic cycle. We are little more wary of microfinance companies, given the farm loan waiver and its possible impact on the willingness to pay.

Our structural call on IT has been that the sector is going to secularly grow much slower than in the past. However, given the sharp under-performance and cheap valuations, relative to the market, investors wary of a correction could view this as a lower risk tactical play.