 "Jigar Shah")
The markets are not pricing in the possibility of a downward revision in corporate earnings due to demonetisation, says JIGAR SHAH, chief executive officer, Maybank Kim Eng Securities. He tells Puneet Wadhwa that foreign investors are concerned about a cut in earnings and loss of momentum in the Indian corporate sector/economy due to the note ban. Edited excerpts:
What is your interpretation of the statements of major global central banks?
The US economy is clearly doing better than Europe and, hence, the rate increase by the US Federal Reserve was a foregone conclusion. Europe is facing the headwind of Brexit, high debt in Italy and a relatively weaker banking system. All this will make it difficult for liquidity to be tightened.
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Can the rally in global equities sustain?
The rally could get affected as the fixed income market becomes more attractive. Also, crude oil and metal prices are hardening, which allows global investors to shuffle their money into these assets. For emerging markets (EMs), 2017 could be more challenging than the past two years, as foreign flows could shift. Also, strengthening of the dollar will lead to currency volatility, negative for the emerging markets. Another largely unknown is the US trade policy in the Trump regime. US protectionism could be an overall spoilsport. I do not see many triggers at this point.
How comfortable are you with the current valuation of Indian markets?
The Nifty is now trading close to 15x the one-year forward price-to-earnings. This is without considering the impact of demonetisation on the consensus earnings for FY17 and FY18. The expected growth rate of earnings without demonetisation is 15 per cent per annum for each of the next two years. Some downward revision is inevitable, which is not yet priced in.
Can demonetisation impact earnings pick-up/recovery and trigger a sell-off over the next few months?
The market has fallen by six or seven per cent from its level prior to November 8. If the negative surprise in earnings is very sharp or lasts longer than March, it can trigger a sharp sell-off. In our worst case, the Nifty could decline by 8-10 per cent from current levels due to a demonetisation-led earnings cut and other global factors.
How are foreign investors seeing the developments in India?
Foreign investors have been net sellers since November 8 in both debt and equity in India. Their key concern is the cut in earnings and loss of momentum in the corporate sector/economy due to demonetisation. This event, because it was unexpected, caught many investors off-guard, and that is painful for them. For the medium to long term, foreign investors remain constructive about India and will consider the positive impact of demonetisation as those play out in terms of greater tax receipts, rate cuts, tax cuts, etc.
Which sectors are you overweight on and underweight on thus far in 2016? What is the strategy for CY17?
For the near term, we recommend investors to be defensive. We prefer investment into software, pharma, quality infrastructure companies, some telecom and manufacturing companies, with export focus within the auto sector. We also like private banks because they would benefit from the ongoing shift in the sector due to their superior technology and capitalisation. We also like some wind energy turbine manufacturers.
Is the easy moneymaking phase over?
Moneymaking was perhaps never easy — and will never be — with so many participants trying to outsmart one other. In the context of the Indian market, the euphoria which started in mid-2014, giving sharply higher returns, cannot continue every year. A double-digit earnings growth rate for the Indian corporate sector has been elusive, and that phase will get extended for some more time.
A phase which provides good money making opportunities will return after a meaningful correction, which will bring reasonable margin of safety. Till then, it is best to do bottom-up investing in high conviction stocks where either the business is resilient or the valuation prices in the worst.
