 "Prabhat Awasthi")
Given the sharp rally since the past few months, Prabhat Awasthi, head of equities for India at Nomura tells Puneet Wadhwa that valuations now appear to be relatively expensive. "While the risk of a correction goes up in the near term, on a long-term basis the Indian market is on an absolutely strong footing," he says. Edited excerpts:
Is the rally in global equity markets sustainable?
The rally in global markets is largely the result of changes in expectation with regard to the rate cycle, especially the pause in the (US) Federal Open Market Committee as a result of the Brexit-related consequences that have come to the fore. Risks to markets are there simply because global growth is still uncertain and remains a key risk to a continued rally. The fact that markets have priced in a lower cost of risk means the risks from poor global growth are now higher.
How does India look among the emerging market pack?
India stands out, for sure, simply because India is seeing improvement in its growth profile and other macro fundamentals remain excellent. On the other hand, economies globally are very slow. In most countries, there is massive struggle for growth and here India certainly stands out.
The outlook for markets is an entirely different question. They're definitely back on their feet, after a poor start at the beginning of the year. This rally in the markets has taken place in a really short span of time. If you look at where the valuations were even four months earlier, these are now relatively expensive. It also means the risk of correction goes up in the near term. However, we must note that on a long-term basis, the Indian market is on an absolutely strong footing, as it would be driven by improving fundamentals.
What about mid-caps and small-caps?
We shouldn't look at mid-caps as an asset class. It is important to recognise that mid-caps, while they present a riskier class of stocks than large-caps, are not a uniform asset class. Hence, the themes one will play for large-caps would be very similar to those one would play for mid-caps. When growth is picking up, mid-caps being smaller companies, are typically able to grow faster. It is much tougher for large-caps to eke out growth. So, as the economic cycle improves, mid-caps have a higher chance of delivering higher growth.
So, which sectors should do well?
If one is bullish on the economy, mid-caps should do well. If you look at sectors which derive their revenues from the Indian economy rather than export-related sectors, all sorts of themes are doing well. Consumption, industrials and financials are doing well. It's a wide variety to choose from, in terms of themes but I will emphasise that it is not a uniform thought process about mid-caps as an asset class. It will vary, stock by stock and sector by sector.
Are the markets fully pricing in the likely benefits from the passage and implementation of the goods and services tax (GST) bill? Should one use an upside in the market to exit?
The timeframe of gauging the benefits is critical in this case. Notably, stocks related to GST have done well but the extent of benefit can be much larger in the long-term than what the markets think. GST is truly a game-changer, and it is indeed a very important reform that has taken place. The benefit of which can be reaped for years to come. My point of view is that in the short-term the rally might have happened, but in the long-term there are still benefits that will unravel themselves for the economy.
Do you think implementation of GST (the proposed goods and services tax) could get delayed beyond April 2017? How are the markets likely to react to this?
There is some chance of delay but the government seems determined to get it through. In terms of stock market sentiment, a delay of about six months will not hurt. If it happens, it will be because we might be under-prepared but not because GST is being rolled back. We are introducing something radical in terms of tax reform and there will be challenges in implementing it.
What was your investment strategy in the first half of this calendar year?
First half and second half would not be the right way to think about it. You are either bullish or bearish on the market - we have been bullish. Our strategy has been to buy especially in financials, the oil & gas sector, cement and select industrials. We have generally been bearish on pharmaceuticals and metals. Our strategy largely stems from the belief in the prospects of the Indian economy, and our stock selection has generally been driven by that.
What have been the key takeaways so far from the June quarter earnings season? What are your earnings estimates for India Inc in FY17 and FY18?
It has been an average quarter. Unlike the previous earning season, which surprised positively, this has been more balanced. I think 15-17 per cent is a good number for a growth forecast (for FY17), which is also the overall consensus for market earnings growth.
From an investment perspective of say 12 – 24 months, should investors avoid classical defensive plays like FMCG, pharmaceuticals and information technology (IT)?
We have been bullish on technology and bearish on pharma and consumers. A portfolio needs to be balanced simply because the global uncertainty is still there and the economy is still not fully out of the woods. So it does not make sense to put all the eggs in one basket and not diversify.
We think that there has to be some element of defensive play. The stocks in all these three sectors are generally above average companies, they are growing earnings and it’s not that you are going to lose out completely on capital appreciation. I think the question is whether the market is going to perform better than some of these sectors or not – and the underperformance is possible given that consumer is very expensive in terms of valuations.
What is your outlook for interest rates, and your strategy for interest rate sensitive sectors like automobiles and banks in this backdrop?
Our economics team forecast is for one more rate cut through this year. We have been bullish on rate-sensitive sectors like automobiles and banks.
