India is still a 'buy on dips' market: Macquarie Group's Sandeep Bhatia

In a geopolitical event, India will be seen as a relatively safe haven within Asia, says Sandeep Bhatia

North Korea’s indication of testing a hydrogen bomb rattled global financial markets last week at a time when the US Federal Reserve (US Fed) decided to unwind its balance sheet, starting October. SANDEEP BHATIA, managing director and head of equity India, commodities and global markets, Macquarie Group, tells Puneet Wadhwa that in a geopolitical event, India will be seen as a relatively safe haven within Asia. Edited excerpts:
 
Your reading of the geopolitical situation and the outcome of the US Fed meeting?
 
The broad risk to the rally is what’s happening globally. The global risk factors have gone up – both political and financial risks are high. Market valuations are globally high. A cut in global growth assumptions can trigger a correction. Currently, the markets are believing there is reflation —in both the US and China. In case there is a change in growth assumptions there, the markets could see some correction.
 
How concerned are you about market valuation?
 
The market valuation will not change till we see anything significant in terms of a change in the government’s policy direction. Valuations are high across global markets. That said, India’s proportion of (corporate) profits to gross domestic product (GDP) has dipped to an all-time low and this will improve. Earnings growth will rebound and, hence, it is difficult to say the market valuations have peaked.
 
Your return expectation from the markets?
 
Both foreign direct investment and foreign institutional investment into India remains healthy. Most people will be surprised, I think, by the strength of the earnings rebound when that happens. The markets, in our view, can give a compounded annual growth of at least 15 per cent from here onwards for the next three years. This is a conservative estimate that can easily be exceeded.
 
Was the recent $3-billion outflow by foreign institutional investors (FIIs) a one-off then?
 
That was profit-booking. The markets have not stopped performing despite FII outflows, as there has been inflow from domestic funds. Equities offer one of the best return potential among all asset classes in India. Domestic flows should continue to remain strong. If there is a geopolitical event, I think India will be seen as a relative safe haven within Asia.
 
How long before we see an earnings revival?
 
We will have to wait another six months for earnings to start growing. A lot of structural reform happened recently, which is good for the country but challenging in the near term. The country is undergoing the biggest political economy reform in its history, which will help boost tax revenues over the longer term. In the near term, however, there will be disruption due to compliance with the new norms. The good thing is all this happening at a time when crude oil prices are under check and that has helped keep inflation manageable.
 
What are your earnings estimates for FY18 and FY19?
 
I expect (annual) earnings growth of at least 15 per cent over the next three years. It could be over 20 per cent in case interest costs fall and get reflected in the bottom line. That said, the rupee has to remain supportive.
 
Which sectors will lead the next leg of the market rally?
 
The domestic investment cycle-related sectors. Capex- and industrial-led ones will outperform. Export-oriented sectors have their own issues. I don’t see a major rebound in information technology and pharmaceuticals in the near term.
 
That apart, private banks and select public sector banks should also do well. Consumption, especially automobiles, should also do well. Portfolio strategy depends on the individual investor and their personal circumstances but generally I would say we still are a ‘buy on dips’ market, rather than a ‘sell on a rally’ one.

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