Markets can bottom in early 2017, and then rise gradually: Deepak Jasani

Interview with Deepak Jasani, head of retail research at HDFC Securities

As the New Year begins, DEEPAK JASANI, head of retail research at HDFC Securities, tells Pranati Deva that metals, oil & gas, auto and banking & financial services are some of the sectors likely to remain in focus in CY17. Edited excerpts:
 
What is your overview of the market landscape in 2016?
 
The year 2016 was an eventful one for investors – starting from the China slowdown, to a recovery in crude oil prices from record lows, a fall in global interest rates towards the end (some countries witnessed negative rates), and major surprises like the Brexit, GST Bill getting stuck, demonetisation, and Donald Trump’s victory in the US Presidential election.

 

Despite all these events, the National Stock Exchange Nifty managed to end the year in the positive and the rise from the intra-year low was a smart 18%. Sectorally, the year 2016 was a mixed one, with metals and oil & gas ending the year with sharp gains, while health care, telecom & IT losing the most.
 
What is your outlook for the year 2017? Where do you see Sensex and Nifty headed in 2017?
 
Indian markets could make some sort of a bottom in early 2017, and then gradually rise with some intermittent corrections thrown in. We don’t have any time targets for the Nifty50 or S&P BSE Sensex.

 
Which sectors do you see coming back to focus and why?
 
Metals, oil & gas, auto, banking & financial services and auto ancillaries are some sectors that will be in focus in 2017.
 
The metals space could get tailwinds due to expected large infra spends by the US and China, as also the supply bottlenecks at select global suppliers. Protectionist policies followed and expected to be followed by various countries could also help companies in consuming countries. The rising value of the dollar remains a headwind, but we expect a reversal or range-bound dollar value for some time.

 
The oil & gas space could do well due to unshackling of the whole industry by the central government over the past few years. Buoyant crude oil prices (expected to stay at their present levels or rise a bit) and strong refining margins could help both exploration companies and the downstream companies in India, which is anyway witnessing healthy growth in consumption of petro products.
 
The auto space has been beaten down quite sharply due to demonetisation-related fears. We expect the demand to restore to normal levels soon enough. The medium-term view on auto in a country like India is bullish. Within the auto space, two-wheelers and passenger vehicles may do better.

 
While Valuations of non-banking financial companies (NBFCs) had run up quite a lot as of September-October 2016, they are now reverting to mean, and well-run NBFCs might become attractive after a further 12-18% decline. Private banks continue to perform well, but they may face some slippage/bad debt issues due to demonetisation. If this happens, their prices could react and offer attractive entry levels. State-run banks need to bring slippages under control and show some progress on non-performing assets (NPA) resolution to become worth a look despite being flooded with deposits lately.
 
How do you see banking and IT sectors performing in 2017?

 
In the New Year, the information technology stocks will largely remain range-bound, with a negative bias, despite the rupee tailwind. The sentiment will remain cautious, as all the large companies are facing structural issues and disruptions in their key areas of operation. Fears related to implementation of policies that Donald Trump announced in the US earlier while campaigning will also contribute to this.
 
However, the banking space, after an initial scare, could do well going further into 2017, as slippages might reduce, and NPA resolutions keep happening, albeit at a slow pace. Credit demand could rise from July onwards, while interest rates could remain flat, with a downward bias.

 
Do you think the markets have priced in the negative impact of demonetisation or will it spill over in 2017?
 
The demonetisation effect is temporary (it could last a few months). This might create a low base for FY17 on which FY18 growth could look sharp.
 
However, people are waiting to see when the non-tax paying informal sector (engaged in agriculture and in small and medium enterprises, or SME, in industry and services, which is said to account for 35-40% of India’s gross domestic product) stops contracting. And, when real estate and construction (large participants in gross capital formation) witness resumption of activities, apart from monitoring the speed and smoothness with which transition to digital economy happens, will also be watched.

 
This will determine whether or not the demonetisation impact is adequately discounted by the markets so far.
 
What are your Budget expectations? Do you think capital gains taxes will be revised in the Union Budget for 2017-18?
 
We expect the Union Budget to be prudent and at the same time reflect the outcome of demonetisation and tax amnesty schemes based on the data on these available by then. Depending on the ultimate accrual to the central government from these, we might see a cut in income tax/corporation taxes, spending on rural/agri infrastructure, skill building and employment generation. Capital expenditure by the government could be raised and necessary measures to kickstart private capex may also be initiated.

 
Though capital gains tax changes are expected from the Budget every year, we do not expect any major changes this time. If at all, the holding period for long-term capital gains on listed shares could be raised, and short-term capital gains rates could be raised a little.