It is a good market for bottom-up stock picking: Jigar Shah

Interview with chief executive officer, Maybank Kim Eng Securities

With the mid-and small-caps outperforming the frontline indices thus far in calendar year 2017 (CY17), JIGAR SHAH, chief executive officer, Maybank Kim Eng Securities tells Puneet Wadhwa that they will now need earnings delivery to sustain at the current levels. Edited excerpts:

How do you see the markets playing out over the next one year?

Over the next one year, markets could be somewhat corrective and range-bound with a slight downward bias. This is due to the recent economic slowdown coupled with consistently below expectations corporate earnings. The domestic liquidity should be good unless there is an upward trend in the interest rates. Foreign liquidity, too, should be favourable and flow could be positive if there is a healthy correction from the current levels.

Do you think the global equity markets are nearing a bubble given that they are rising in tandem and inflated by liquidity? Can this liquidity tap run dry soon?

The United States (US), European Union (EU) and other central banks have already talked about end of cheap money and possible rise in inflation/interest rates. However, the liquidity continues to be abundant and global economies are expanding after many years. It's difficult to say if there is a bubble though there are pockets of exuberance, which could correct in case of a black swan event.

How is the current stock market rally - in India and globally - different from the ones we saw earlier?

The current stock market rally in India has been quite a long one starting somewhere in 2013 and still continuing with intermittent corrections. It's largely driven by super liquidity from foreign and local institutional investors and anticipation of Narendra Modi government getting another term to fully implement reforms which will put India back to 8 per cent growth rate. In the last year, the rally is largely driven by liquidity and despite of disruptive changes in the economy. The past rallies were largely predicated on strong double digit earnings trend.

What are the key risks to this rally?

We are not seeing any sell calls on the markets yet. That is because of India's long term promise as an emerging economy which could continue 7-8 per cent growth for many years and become an engine of growth for other economies like what China did in the past twenty years. Another factor is the strong feeling that a majority government in India with a powerful and charismatic leader will drive better execution than the previous governments.

Do Indian markets look overvalued at this stage? What about the mid-and small-cap segments?

Yes, based on consensus price earnings ratio (PER) of 17-18x one year forward basis, the market is overvalued especially in relation to earnings growth. The situation with small-and mid-caps is no different and many of them have risen exponentially in short period of time; they will need earnings delivery to sustain. However, it's a good market for bottom-up stock picking.

How are your foreign clients viewing India as an investment destination now as compared to the other global markets?

Foreign investors continue to be bullish about India from a long term, structural growth perspective. They would be buyers on dips.

What are your earnings estimates for FY18 and FY19?

It's difficult to predict due to exceptional measures such as demonetisation and now GST. A more normal growth should be expected from the next fiscal both in GDP and corporate earnings.

What are your top sector and stock bets at this stage?

We prefer private banks and financiers (ICICI Bank, Capital First, SREI) , Autos (Tata Motors, Mahindra), Data/Digital enabler (Persistent, Sterlite Tech, Tata Communication), and other value picks such as DB Corp, Hindustan Media Ventures Limited (HMVL), Take Solutions, PTC, Coffee Day Enterprises and Allcargo Logistics. Some of these are contrarian picks. Our sell call is on Axis Bank and Telecom stocks.

How much room does the Reserve Bank of India (RBI) have to cut rates?

May be another 25 basis point (bps) cut is possible in interest rates. The immediate economic data is concerning but not in the backdrop of GST etc. One needs to look at next year's data as more normal one. The government is likely to maintain fiscal deficit target and not resort to any stimulus. If it does, it will lead to increase in interest rate and possible downward revision in credit rating.