Overall market sentiment remains fragile, says Nischal Maheshwari

The announcement of consolidation of PSBs is certainly a step in the right direction, says Maheshwari

The government has made a slew of announcements over the past few days to help prop up the economy. Nischal Maheshwari, CEO for institutional equities & advisory at Centrum Broking, tells Puneet Wadhwa that given the developments, India has moved from a ‘sell on rise’ to ‘buy the dips’ market. Edited excerpts:

Have the markets been too optimistic about the initial measures announced by the finance minister? 

Investors have welcomed the measures. By rolling back the surcharge on foreign portfolio investors (FPIs) and domestic investors, easing the flow of credit, and pushing for faster transmission, the government has provided much-needed respite to market participants. The stimulus was long-awaited. However, the government could have done more for auto. Tax cuts or budgetary support in any form would have lifted sentiment. That said, addressing sectors like micro, small & medium enterprises (MSMEs) and banks, which were a cause of concern, is a step in the right direction. The execution and impact going ahead need to be watched.

Your views on public sector banks (PSBs) after recent announcements?

With the government pumping additional money into PSBs, many of the better quality PSU banks can be considered. As regards NBFCs, one should stick to asset backed ones. The announcement of consolidation of PSBs is certainly a step in the right direction. The merger holds potential to boost credit growth and resuscitate faltering economic growth.

How are FPIs viewing the developments?

Foreign institutional investors (FIIs) & FPIs have welcomed the measures. FII selling is slowing down post the announcement. But given the uncertainties in the global economy over the US-China trade conflict, along with weakening domestic consumption impulses, the overall market sentiment remains fragile. That said, the measures announced by the government are likely to limit the outflow in the near term. With signs of an economic recovery in the second half of the financial year 2019-20 (H2FY20) on the back of the impact of monetary easing, along with the recently announced fiscal stimulus, we may see a reversal of flows. 

Among emerging markets (EMs), where does India stand as an investment destination?

With respect to other EMs, India has underperformed this year. In July alone, FIIs sold close to $3 billion of equity. There were expectations that the new government will announce reforms to help push growth in the economy. However, sentiment has been muted on account of escalating global concerns and ongoing stress in the domestic financial system. Also, amidst weakness of global trade and investment, India is now engulfed in a trap where consumption growth has been lagging, with lower sales in the auto and FMCG sectors, and weak corporate earnings. 

The near-term outlook for investing in equities remains fragile not just in India, but across all EMs. The escalating global risk-aversion environment has boosted the demand for safe-haven asset classes like gold and US 10-year treasury bond yields. The announced fiscal stimulus is likely to show benefits in the second half of the financial year, till then we maintain a defensive view.

Would you term India as a ‘sell on rise’ market or a ‘buy the dips’?

With the recent announcements by the finance minister and a few more anticipated measures, India has moved from a “sell on rise” market to “buy the dips”. The market correction has brought many stocks to reasonable valuations. The measures signal the government’s clear intent to work on solutions to manage the current slowdown. The Nifty has corrected to a price-to-earnings (P/E) of 15.56 on FY21E, making it more reasonably priced.

Your overweight and underweight sectors?

We continue to be defensive in our portfolio approach and are overweight on consumption, information technology (IT), pharma and utilities. We have equivalent weight on banking (largely private sector banks). We will avoid metals given the global challenges, and stick to large- and selective mid-caps.

What policy response can we expect from global central banks?

The G4 central banks are most likely to remain accommodative and signal further easing in their upcoming policies to revive investment and curb disinflationary pressures. The current environment has lifted gold's safe-haven appeal. As the trade war escalates and uncertainty intensifies, we expect investors to remain in safe-haven asset classes like gold and bonds. Yields, especially from domestic, US and German bonds, are expected to soften, reflecting risk aversion, expectations of additional monetary easing and weaker growth prospects.