 "Vineet Bhatnagar")
At a time when global markets, including India, are seeing heightened volatility on account of global headwinds, Vineet Bhatnagar, managing director and chief executive officer, PhillipCapital (India), tells Puneet Wadhwa that an economic revival, coupled with strong fiscal management by the government, should help us through. Edited excerpts:
How do you see the global financial markets perform over the next 6 – 12 months given the developments in the US, European Union (EU), euro-zone and China?
Globally, we are seeing central banks infusing more liquidity to fight the ongoing global slowdown, perk up the inflation and consequently fight off the deflation scare. Unless growth comes back, they will be forced to maintain a status-quo in their approach. Unfortunately, the monetary policies do not seem to be yielding the desired objectives. Nonetheless, excess liquidity has always helped the financial markets but stimulus is like a pain killer which addressing only the immediate pain points.
With each incremental dose the effect is reduced and likewise is the case with every new round of liquidity infusion by the central banks. While liquidity easing will quell some market fears but the chances of negative surprises increase significantly if growth and inflation scenario do not see any improvement. For the global markets, it might very well be a case similar to last year. We might end up where we began.
How are foreign investors looking at emerging markets (EMs) as an investment option. And, where is India in their order of preference?
They're still reasonably optimistic about India. However, India will find it difficult to buck the trend of lower allocations to EMs, though the impact should be lower due to a supportive domestic growth story. In terms of preference for India, the shift from China to India is happening, albeit at a slower pace.
Investors from Japan and other regions are increasingly seeing India as the preferred destination but allocation changes are a little slower than expected, as a full-fledged revival of growth is taking more time than expected. The pace of big-bang reforms is a concern. But, quite a few reforms have been passed, many of which should start having a positive impact on the economy.
Do you think the threat to the Indian market rally is now more from global issues than domestic factors?
Global flows have dictated the strength of Indian markets to a certain extent. The market is now fairly priced on domestic factors. If domestic economic activity picks up in the next couple of quarters, global issues won't be a significant threat to our market performance. Domestic revival, coupled with strong fiscal management by the government, should help our markets to tide through the global volatility. We expect to see markets closing 2016 on an upbeat note. Our December 2016 target for the Nifty50 index is 8,500.
How are market participants viewing domestic issues like pending reforms, the monsoon and the state elections?
They're enthused by implementation of various flagship programmes like DBT (direct benefits transfer) and the government's pro-active stance in getting work done - through finding consensus in the Rajya Sabha or by the executive route. While they understand the roadblocks regarding passing of GST (goods and services tax bill), inability to resolve the deadlock in the past three sessions seems to have taken some sheen out of other accomplishments. While the road to GST is unpredictable, other key bills like the Bankruptcy Code are expected to get passed.
The market is also cautiously optimistic on a normal monsoon this year. A normal to good monsoon has the potential to revive rural demand by the second half of FY17. Further, the coming state elections are more or less academic in nature, as the BJP has significant presence only in Assam. Both AIADMK and TMC, the projected winners of their respective states, have historically given issue-based support to the BJP in Parliament.
Are there any key concerns as regards India – in terms of pace of reforms – as we approach completion of two years of the NDA government?
Pace of reforms is a concern as far as the big bang reforms are concerned. However, quite a few reforms have been passed many of which should start having a positive impact on the economy.
What are your expectations from the March quarter (Q4) earnings of India Inc? What is the road ahead for FY17?
We expect our coverage universe to report a five per cent sales growth and four per cent earnings growth. The automobile, pharmaceutical and information technology (IT) sectors are likely to deliver stronger earnings in Q4. Metals and financials are estimated to be the main laggards. For FY17, aggregating the bottom-up estimates of our analysts yields an earnings growth of 18 per cent. From a top-down perspective, a 14 per cent growth in earnings in 2016-17 is achievable.
The markets have not been able to sustain at higher levels and there seems a lack of leadership in terms of sectors and stocks that could dictate a trend. Which sectors and stocks, in your opinion, could lead the next leg of rally/correction and why?
There is value in quite a few sectors like Telecom, Banking and some Utilities. These could turn the corner and start delivering. Also the big names like Reliance Industries (RIL), which is nearing the end of a heavy capex cycle, could deliver inspiring performance.
Your advice to someone who wants to invest from a year's perspective?
This is a good time to buy from that perspective. The main reason to invest now is because one has choice across sectors. Across sectors, there are stocks to choose from both a value and growth perspective. These are the times to invest, as we think we are at the cusp of the cycle. Our sense is that the market is unlikely to be cheaper six months from now, when the full impact of a good monsoon and pick-up in economic activity will be visible.
Which sectors are you overweight and underweight on?
We are overweight on consumer discretionary (automobiles) and consumer staples, banking, telecom, media and cement. We are underweight on capital goods and IT, and equal weight on pharmaceuticals, with a negative bias.
Can the banking sector still surprise negatively? What about autos and cement?
For banking, the worst is behind us. The quarterly numbers could still surprise negatively, as system noise continues to remain high, but some operating metrics could be turning positive. The nominal growth rate is reviving and that indicates credit growth should improve. The tide is turning for cement and automobiles. The capital goods sector will take a bit longer.
As a contrarian bet, is it time to look at policy driven sectors like telecom, power, aviation, infrastructure and real estate, or do investors still stand a chance of losing money here over the next couple of years?
In the telecom sector, Bharti is a good contrarian bet as it is has a robust product portfolio unmatched by any operator. Also, considering that the market is consolidating which is led by Jio, Bharti will be the biggest beneficiary. Similarly in Power, NTPC looks promising with valuations closer to book value and concerns around the sector as well as stock slowly reducing. The chances of re-rating are fairly high for the stock. In our view, the chances of investors losing money with these contra calls over the next two years is rather low now.
