 "Only expansionary policy stance can justify the rally: Gautam Chhaochharia")
Has the market moved ahead of the positives?
The markets have run up too sharply. These levels can be justified only if we see a change in policy stance that’s expansionary in the near term. If we don’t see a shift in policy and continue to maintain fiscal consolidation and status quo on monetary (policy), we could repeat the story of the past two years — high growth recovery hopes which ultimately underwhelms.
One of the tools for a policy stance change could be using the Reserve Bank's balance sheet to recapitalise banks, increasing money supply or simply monetisation. Linking this and other news around potential review of the Fiscal Responsibility and Budget Management Act and inflation targeting, an expansionary phase in the near term cannot be ruled out completely. But, as of now, nothing has been announced.
How would the markets react to a disappointment on the policy front?
We’d see another season round of earnings growth cut over the next two–three quarters. This happens to be our base case scenario. I see a 10 per cent correction in the market in that case. However, global cues will become more important and might impact the market more.
What are the key things to look for this earnings season?
The fourth quarter (January-March) earnings at an aggregate level beat expectations but only marginally. Select bellwether companies beat estimates sharply, which aided perception of a strong quarter. I expect muted earnings growth in the June quarter. Nifty companies’ earnings growth could be only three per cent. This means in the remaining nine months, Nifty companies will have to grow at higher rates to meet the Street expectation of 17 per cent earnings growth. A cut in earnings estimates are again likely.
Could a good monsoon and the seventh pay commission payout have a big impact on earnings?
I don’t agree that the monsoon or pay commission payouts will sharply drive earnings recovery. The monsoon will not be a big driver of rural recovery; at best, it will be a marginal positive. Crop prices and government spending in rural India matter more. Similarly, pay commission implementation is likely to be diluted and staggered, given the fiscal constraints. So, it might not be a big boost, especially as it’s happening along with fiscal consolidation.
What is driving markets globally and what are the key global risks?
Faith in liquidity and central banks are driving equities globally. Our global published view is that the US Federal Reserve will hike rates only in December and we expect another two rounds of hike next year. If growth surprises negatively, globally, it will impact the markets. Developments in China, progress on the UK’s renegotiation with the European Union and the policy of the European Central Bank will also matter.
How does India compare to emerging market peers?
The relative attractiveness remains intact. And, likely to remain so, unless we see Indian policy making stumble. Any expansionary policy could also be fraught with risks, especially to macro stability. But, a broad-based global deflationary cycle could affect India.
Which sectors are you positive and negative on?
We have been underweight on (information) technology for 18 months. Our concerns about the structural headwinds the industry is facing stems from legacy business slowdown, not compensated by the transition to digital. We are overweight on automobile parts, non-bank financials, retail-focused private banks, oil & gas, telecom and media. The biggest overweight for us is the pharmaceuticals segment. In our view, a lot of negatives the market and investors are worried about are backward looking and (already) priced in.
How will changes in oil prices impact our market and economy?
Oil at $50 a barrel is a sweet spot for India. At $30, it could indirectly hurt India as global growth slows and at $60 or above it, it would hurt directly. Between $60 and $70, our balance of payment starts to move to a deficit zone. At these levels, on a relative basis, India might also become weak, as would the other emerging markets.