Our June 2019-end target for Nifty50 index is 11,892: Saion Mukherjee

The markets have been gaining ground amid a weakening rupee over the past few weeks. SAION MUKHERJEE, head of India equity research at Nomura, tells Puneet Wadhwa that though it seems unlikely that just the current rupee depreciation can trigger a sell-off, a substantial depreciation leading to higher inflation/monetary tightening could hurt growth, and hence markets as well. Edited excerpts:

Where do you see the frontline benchmark indices a year from now? 

Our June 2019-end target for the Nifty50 is 11,892. The key threat to the India story includes risks to valuations coming from the possibility of an emerging markets sell-off due to global uncertainties such as a trade war and liquidity tightening, and deterioration in macroeconomic fundamentals and political uncertainty caused by a series of upcoming elections. 

But, markets seem to be racing ahead as if they have already handed over a victory to the Narendra Modi-led National Democratic Alliance (NDA) in the 2019 elections. Your view?

As a base case, the Bharatiya Janata Party (BJP)/NDA is likely to emerge as the single largest bloc and would have the best shot at forming the next government. Also, note that in the no-confidence motion held in Lok Sabha in July 2018, the BJP aimed for direct or indirect support from some large non-NDA parties. The overall outcome raises questions about the strength of the Opposition's unity. However, political uncertainty will continue to remain.

What is certain is that the thrust is likely to remain on expediting implementation of schemes targeting the rural and poorer sections of society, and addressing agricultural distress. Key stocks that we see benefitting from growth in the rural economy include Mahindra & Mahindra (M&M), Hero MotoCorp, Crompton Consumer, Dabur and M&M Financial Services.

Where do you see the rupee over the next three-six months?

The rupee has been the worst-performing currency in Asia. The rising trade deficit is also putting further depreciation pressure. In the backdrop of higher trade deficit fuelled by elevated oil prices and rising manufactured goods imports, the rupee is likely to have a depreciating bias.

Can this trigger a risk-off phase in the Indian equities?

Markets have held up well as currency-adjusted market performance is positive year-to-date (YTD). Hence, markets have not taken the YTD depreciation as a negative as the growth story in India remains on track. So far, it seems less likely that just current depreciation should trigger a sell-off. However, a substantial depreciation leading to higher inflation/monetary tightening could hurt growth, and hence markets as well. 

What’s your view on the mid- and small-caps?

On a relative basis, the valuation of some mid- and small-cap companies have become attractive, and hence, we think there is a case to evaluate some of those opportunities. Within mid-/small-caps, we will prefer companies with strong balance sheets and good governance standards. In a challenging and uncertain macroeconomic environment, don't expect a broad-based rally in mid-/small-caps.

How do you see flows — domestic and foreign — to the Indian equities panning out over the next one year?

We’re concerned on foreign flows amid concerns on tighter liquidity is driven by rising rates globally. Risks also emerge from possible balance sheet normalisation by G4 central banks. Our economics team forecasts that global incremental liquidity will begin to decline, starting the fourth quarter of the calendar year 2018 (Q4CY18). 

Domestic flows continue to remain healthy, though they have come off from a high base. In our view, the rise in domestic flows is supported by the structural story of increased financialisation of savings. This should continue to sustain in the future.

Your overweight and underweight sectors?

We remain overweight on autos, financials, gas suppliers, health care and infrastructure sectors. Our underweight sectors include consumer staples, cement, oil PSUs, IT services, power and telecom. This is represented in our India model portfolio.

Do macroeconomic numbers lend hope to a pick-up in corporate earnings growth?

We’re cautious on India's macroeconomic situation, particularly inflation, combined fiscal position of states and the Centre and rising trade deficit. However, we remain positive on earnings growth trajectory. In fact, in the April–June 2018 earnings season (Q1FY19), results for our coverage universe beat our estimates at all levels. The current forecasts by our analysts suggest that consolidated earnings for Nifty 50 companies should rise by 25 per cent CAGR (compounded annual growth rate) over FY18-20.