 "Markets may be re-rated by December: Rakesh Arora")
Rakesh Arora, managing director and head of research, Macquarie Capital, believes if reforms like the goods and services tax and bankruptcy code kick in this year, the Nifty can touch 9,200 by December. In conversation with Sheetal Agarwal, he talks about the yuan devaluation and investment themes in India. Edited excerpts:
What is your outlook for Indian markets in 2016?
India is trading at 15 times one-year forward earnings, closer to its 10-year average. Valuations are moderate and large-caps, in particular, have fallen a bit. If India can get through reforms such as the goods and services tax and bankruptcy code, I think the Indian market can be re-rated by the end of the year. Our target is 9,200 on the Nifty. We think the market should not go below 7,500 on a sustained basis. Earnings might improve only in 2017-18 but the markets might be re-rated much faster.
How will developments in China impact global markets?
All eyes are on China, especially the level at which the yuan devaluation stops. Our house call is the depreciation will be between four and six per cent in 2016, and that should help soothe some nerves. We are saying that China will not have a hard landing and we are optimistic.
China's devaluation means more global deflation. Highly indebted companies need higher nominal growth to pay their interest costs. In a deflationary environment, nominal growth goes down. To that extent, there are problems for high-debt companies and countries.
India's currency will also have to be devalued, as exports are already running at a much lower level. Global demand is not strong and this competitive devaluation leads to a frenzy. The West Asia situation compounds this further. So, one has to be circumspect right now. The rupee will be range-bound between 66 and 68 to a dollar in 2016 and we do not expect it to touch the 70 levels.
How are foreign institutional investors (FIIs) looking at India?
FIIs have been risk-averse for long and have pulled out about $50 billion year-to-date. Fortunately, that number is still positive for India. They are pulling out at a much slower pace in India than in other countries such as Brazil and Russia. We believe the deflationary environment is good for India because it is a net consumer of commodities.
Are earnings downgrades bottoming out?
The consensus is still factoring earnings growth of 16-17 per cent for 2016-17. We believe 2016-17 earnings should be 10-11 per cent. We are not going back to 18-20 per cent earnings growth in 2016-17, that might happen in 2017-18.
Which sectors will drive earnings?
The infrastructure belt - roads, railway and power transmission - is doing well. Second is urban consumption. The government is trying to put more money in the hands of people. Also, interest rates have come down, leading to better affordability. This is already visible in automobile sales. We are positive on urban consumption-related sectors. Also, there are earnings upgrades in some oil marketing companies and media companies.
Which sectors will be the laggards?
Some of the cyclical sectors such as materials should lag behind because the recovery is patchy. We are also worried about public sector banks and their non-performing assets. The information technology sector will see some pressure in demand.
What are the key takeaways from the Macquarie's 20 Years in Asia report, especially related to India?
The Indian market has grown 12 times in the past 20 years and we think it can do a similar feat over the next decade. We will see some e-commerce companies becoming multi-baggers. Quality mid-cap stocks will also do well for the next 20 years. Investors need to be selective about corporate governance and management efficiency while investing in these.
What is your outlook for Indian markets in 2016?
India is trading at 15 times one-year forward earnings, closer to its 10-year average. Valuations are moderate and large-caps, in particular, have fallen a bit. If India can get through reforms such as the goods and services tax and bankruptcy code, I think the Indian market can be re-rated by the end of the year. Our target is 9,200 on the Nifty. We think the market should not go below 7,500 on a sustained basis. Earnings might improve only in 2017-18 but the markets might be re-rated much faster.
How will developments in China impact global markets?
All eyes are on China, especially the level at which the yuan devaluation stops. Our house call is the depreciation will be between four and six per cent in 2016, and that should help soothe some nerves. We are saying that China will not have a hard landing and we are optimistic.
China's devaluation means more global deflation. Highly indebted companies need higher nominal growth to pay their interest costs. In a deflationary environment, nominal growth goes down. To that extent, there are problems for high-debt companies and countries.
India's currency will also have to be devalued, as exports are already running at a much lower level. Global demand is not strong and this competitive devaluation leads to a frenzy. The West Asia situation compounds this further. So, one has to be circumspect right now. The rupee will be range-bound between 66 and 68 to a dollar in 2016 and we do not expect it to touch the 70 levels.
How are foreign institutional investors (FIIs) looking at India?
FIIs have been risk-averse for long and have pulled out about $50 billion year-to-date. Fortunately, that number is still positive for India. They are pulling out at a much slower pace in India than in other countries such as Brazil and Russia. We believe the deflationary environment is good for India because it is a net consumer of commodities.
Are earnings downgrades bottoming out?
The consensus is still factoring earnings growth of 16-17 per cent for 2016-17. We believe 2016-17 earnings should be 10-11 per cent. We are not going back to 18-20 per cent earnings growth in 2016-17, that might happen in 2017-18.
Which sectors will drive earnings?
The infrastructure belt - roads, railway and power transmission - is doing well. Second is urban consumption. The government is trying to put more money in the hands of people. Also, interest rates have come down, leading to better affordability. This is already visible in automobile sales. We are positive on urban consumption-related sectors. Also, there are earnings upgrades in some oil marketing companies and media companies.
Which sectors will be the laggards?
Some of the cyclical sectors such as materials should lag behind because the recovery is patchy. We are also worried about public sector banks and their non-performing assets. The information technology sector will see some pressure in demand.
What are the key takeaways from the Macquarie's 20 Years in Asia report, especially related to India?
The Indian market has grown 12 times in the past 20 years and we think it can do a similar feat over the next decade. We will see some e-commerce companies becoming multi-baggers. Quality mid-cap stocks will also do well for the next 20 years. Investors need to be selective about corporate governance and management efficiency while investing in these.
For disclosures visit www.macquarie.com/disclosures