The markets now look forward to central banks — the US Federal Reserve and the Reserve Bank of India — for cues on rates over the next couple of weeks. MAHESH NANDURKAR, executive director and India Strategist at CLSA, tells Puneet Wadhwa that he remains optimistic about foreign flows despite the Budget proposals. His Nifty50 target for March 2020 is 12,000. Edited excerpts:
Do you expect selling by foreign investors to pick up the pace?
The developments in the last few sessions have dampened investor mood. However, we also have to look at the global backdrop, as the market is now dependent more on foreign flows. The global backdrop remains conducive and we are looking at a benign liquidity environment. Such an environment is good for emerging markets (EMs). The portfolio weightage of foreign investors on India is also at a moderate level – just about 50 to 100 basis points (bps) overweight. So, if money starts flowing into EMs, India will get its fair share. Our base remains that foreign inflows will continue.
Aren't Budget proposals a deterrent?
The proposed public float norms are a big deterrent as it adds up to around $35–$40 billion worth of equity supply into the market, which is a huge quantum to absorb. That said, it is not a done deal yet. The government has just recommended this to Sebi, and I am sure that the regulator will go through its consideration process. This measure will not be implemented in a hurry. That said, if this proposal does get implemented, it will surely be a cause for concern. Additionally, higher taxation of foreign portfolio investors (FPI) is a negative, but easier global liquidity environment should supersede these factors.
What are your Nifty targets?
We have not done any recalibration for target levels. We remain optimistic about foreign flows despite the budget proposals. Our March 2020 Nifty50 target is 12,000. Systematic investment plan (SIP) remains the best option for retail investors.
Your earnings estimates for FY20?
For CLSA’s coverage universe, earnings growth is likely to be around 8 per cent. The overall numbers are being dragged down by oil PSUs. If they are removed, earnings growth is likely to be around 29 per cent. This should not be viewed as a very exciting thing. The financial sector is likely to drive earnings. Except for financials, we are looking at moderate low single-digit earnings growth in FY20.
Will we see a further slowdown ?
Economic data has been weak. We exited the fourth quarter of the last financial year (Q4FY19) with a GDP print of 5.8 per cent -- the lowest in four years. The June quarter will be no different. However, we do expect a mild recovery on a sequential basis because the housing market is showing some recovery. We expect things to improve in the next six-nine months in the real estate sector, which is a large part of the economy. For FY20, GDP growth should be between 6.5 per cent and 7 per cent.
But banks remain a spot of bother.
The risk-reward is more in favour of corporate-focused banks. Outside of the banking, the top tier non-banking financial companies (NBFCs) which can raise funds at reasonably attractive prices should continue to do well. Tier-2/tier-3 NBFCs are still a problem.
Will US Fed, RBI cut rates?
The consensus expectation from the US Fed is that it will cut rates – may be more as we go ahead in the second half of the calendar year 2019. Back home, we have been highlighting since quite some time that there is a lot of room for the rates to go down, especially now that the CPI (consumer price inflation) is well under control. This is primarily due to low food inflation, as there has been an overall improvement in farm productivity. There is scope for another 75–100 bps cut in the repo rate in the rest of FY20.
Your preferred sectors?
We remain overweight on the financial sector, which includes private banks with a focus on corporate-oriented ones and select state-owned banks. We also like insurance companies and tier-1 NBFCs, industrials and capital goods and property developers. Property developers remain our single-largest high-conviction sector. We are also overweight on the telecom sector.
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