'Poll outcome unexpected; need a quick replacement for Urjit Patel'

Foreign investors now will take a wait-and-watch approach as regards India, given these developments, says Jitendra Gohil

Outcome of state assembly polls and the sudden exit of the Reserve Bank of India’s governor has kept markets on the edge. Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management tells Puneet Wadhwa that foreign investors now will take a wait-and-watch approach as regards India given these developments. Edited excerpts:

How are you viewing the state poll outcome and the resignation of the Reserve Bank of India (RBI) governor?

The resignation of Dr Urjit Patel as the RBI governor is certainly a negative event for financial markets, especially in the context of the government and the RBI having differences of opinions on various issues. While there is no fixed timeline for a new appointment, the government will have to move fast and announce a credible replacement quickly – someone who has worked with institutions such as the International Monetary Fund (IMF) or the World Bank (WB) – to calm the market. Else, in our view, sentiments could worsen, especially for foreign portfolio investors (FPI) investors, in the short term. That said, we are closely watching for comments/actions by various credit rating agencies – so far, Moody’s has taken a wait-and-watch approach. 

In terms of state polls, the outcome seems to be slightly worse than what the market has been anticipating. I would look past this and focus more on market fundamentals such as earnings trajectory, valuations, the global macro backdrop etc. There could be initial bouts of volatility in the short term, but historically, in the medium-to-long term, the relation between an election outcome and market performance has been thin. 

Do you think foreign investors will start to pull out aggressively from the Indian markets given these developments?

As mentioned before, the government will have to quickly find a credible face. For long-term FPI investors, the credibility and independence of these institutions matter. In terms of flows, FPIs were already cautious on India given the relatively high valuations compared with that of peers. In addition, India has already witnessed a good amount of outflow, amounting to over $11 billion year-to-date (YTD), from equity and debt combined. 

We think foreign investors will take a wait-and-watch approach. Globally, we are positive on the emerging market given its valuation gap versus the developed market, the patient approach by the US Federal Reserve (US Fed) toward raising interest rates, and our neutral outlook on the US dollar. As regards India, there are too many moving parts and valuation is stretched – hence, we have an underperform view on the market.

Where does the RBI governor's resignation leave the reform/policy process as regards the bank and non-bank finance companies (NBFCs)?

I think not much will change and the impact will be curtailed. RBI’s MPC framework is solid and credible, and the central bank has already started turning dovish. The special dividend issue has been already referred to an independent committee and liquidity issues for NBFCs will slowly get sorted out, supported by aggressive open market operations to be undertaken by the RBI until March 2019. We think NBFCs will continue to struggle for some more time and private banks will gain market share. In this context, any sharp correction should offer good buying opportunities in private banks.

Which other sectors can investors look at the current juncture?

The structural outlook for India has strengthened. India’s very high real interest rates will help absorb any external shocks in our view. Besides, earnings trajectory is going to accelerate. We believe there are good bottom-up stock picking opportunities in the energy and utility, private banks, and IT sectors.

What are the key risks for the markets now? 

In our view, a sharp slowdown in global growth or recession worries will have a major impact on the financial markets over the next 12 – 18 months; not our central scenario. For 2019, Credit Suisse’s Investment Committee remains positive on growth and sees moderate returns for the market. Domestically, we are closely watching the risks arising out of the stress in the real estate sector and its impact on growth. After the temporary impact on earnings due to various factors including non-performing asset (NPA) recognition, GST, demonetization etc., over the past 2-3 years, corporate earnings are well positioned for an acceleration. 

So, what are your estimates for corporate earnings?

Already, consensus estimates are predicting Nifty EPS growth of 20 per cent for financial year 2019 – 20 (FY20), which we think could settle close to mid-teen levels, higher than the 10 per cent-12 per cent growth in the current financial year.

Regarding politics, we think what matters for markets are stability and certainty of government policies. Otherwise, in the medium-to-long term, market returns even out and reflect the fundamentals of the country and corporates. Over the past 5, 10, 15 and 20 year period, the average GDP (gross domestic product) growth has been around seven per cent, irrespective of the government in power.