Market performance in Samvat 2075 was unsatisfactory: Motilal Oswal

Markets are likely to remain range-bound in the near term till economic recovery is visible, says Motilal Oswal

Market performance in Samvat 2075 wasn’t satisfactory; the broader market participation was missing, says MOTILAL OSWAL, managing director and chief executive officer of Motilal Oswal Financial Services. In conversation with Sundar Sethuraman, Oswal says market gains will be capped until there is economic recovery. Edited excerpts:

The market has gained 12 per cent in Samvat 2075. Are you satisfied with the performance?

It is difficult to say as the broader market participation was missing. The market continues to favour quality in times of tepid earnings growth. Samvat 2075 was marked by domestic and global economic slowdown, even though the markets touched new highs, with the Nifty breaching 12,000 after the Bharatiya Janata Party’s win in the 2019 general election. The euphoria was short-lived; the focus shifted back to fundamentals. It recouped again after the corporate tax cut announcement. But the trend of wide divergence within the Nifty and between the Nifty and mid- and small-cap indices remains.

What are the key headwinds facing the market?

Since the Infrastructure Leasing & Financial Services crisis in September 2018, the financial sector has continued to see elevated stress across non-banking financial companies and housing finance companies. This has now spread to the banking sector as well. Macroeconomic data, such as auto volumes, industrial production, and core sector growth has been sliding for some time. Gross domestic product growth estimates have been revised downwards, pointing towards a tough near-term macro environment. Corporate earnings continue to see downgrades, with hopes of recovery getting delayed. Globally, there are concerns around economic slowdown and the impact of the US-China trade war.

How will the cut in corporate tax impact the companies and the overall economy?

The corporate tax rate cut, along with incentives for new manufacturing companies, is a positive catalyst for the economy. It will improve corporate profitability. It augurs well for private capital expenditure investment cycle over the next few years. While it may entail some risks for 2019-20 (FY20) fiscal deficit, prioritising growth is the right policy stand in the current environment. From a near-term perspective, it has revived sentiment and provided earnings boost to sectors like financials, consumer and auto sectors.

What is your outlook for Samvat 2076? What will be the global and local factors which will influence market movement?

Markets are likely to remain range-bound in the near term till economic recovery is visible. The three key factors which would influence market movement would be the health of the financial sector, further stimulus announcements by the government, if any, and resolution of the US-China trade war. We also expect foreign portfolio investment flow to improve.

How much time will it take for the economy to come out of the woods? What measures should be taken to revive the economy?

The Reserve Bank of India, since February 2019, has been accommodative and cut repo rates by 135 basis points (bps). With inflation under control and a stable currency, the interest rates appear to remain soft. This would give consumption a push in the festive season. The recovery in monsoon should also bolster rural consumption. These actions should lead to gradual recovery in macros over the next few quarters. The real estate sector needs more attention, although some measures have been announced.

When can one expect meaningful pick-up in earnings?

Since the underlying demand in the economy is still weak, corporate earnings are expected to remain tepid in the near to medium term. Earnings downgrade risks continue on account of tepid demand, uneven asset quality trends in financials, and the deflationary trends in commodity prices. Hence, the reduction in corporate tax rate is unlikely to drive big upgrades in FY20 and would largely limit the earnings downgrade. However, we expect it to be a big booster for 2020-21 (FY21) earnings as economic revival picks up. We are expecting 12 per cent earnings per share growth for Nifty in FY20 and a strong revival of 28 per cent growth in FY21.

Investors are fretting over the health of the financial sector. Are the fears warranted? Is the worst over?

The rating downgrades for stressed companies have resulted in new names being added to the stressed asset pool. However, the incremental stress is much lower, compared to what we have already seen in the past few years. Recoveries from large National Company Law Tribunal resolutions and the normalisation of credit cost should aid the financial sector’s profitability. Further, the corporate tax cut should lead to higher corporate savings, which will improve their ability to pay debt obligations. Our analysis suggests that whenever corporate savings increase, loan demand spurs the economy as the investment cycle picks up. Notwithstanding the near-term concerns, we are positive on the long-term future of financials in India.

What is your advice to investors during these challenging times?

Nifty is trading at 20x its estimated FY20 earnings and hence, could offer limited upside from the current levels. However, several large and select quality mid-caps are trading at a substantial discount to their respective long-period average valuations. Investors would be better advised not to chase low-quality stocks which have fallen sharply in the current market, as they are unlikely to recover without the backing of sound fundamentals. Investors with medium- to long-term perspective can look at large quality caps as well as select mid-caps and use the market volatility to build a solid long-term equity portfolio.