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The headwinds notwithstanding, the market could still deliver positive returns in 2015, says Nirmal Jain, chairman, IIFL group. The bull run is still intact and earnings revival could be two quarters away, he said. In conversation with Samie Modak, he says India is unlikely to go off the foreign investor's radar and remains a bright spot among global markets. Edited excerpts:
What according to you has triggered the market correction?
Quite a few developments have coincided, triggering a fall. The corporate earnings are weak and some believe the government's reform process has not met expectations.
For foreign investors, the retrospective tax is a serious concern, as it may become a significant liability for some of them. Considering the large foreign capital investment in our equity markets, a little ambiguity in government's decisions affects the flows and they weigh heavily on the equity market. Besides, there are concerns about a likely weak monsoon, a rebound in global crude oil prices, which is a negative for a major energy importer like India.
A lot of funds were overweight on India. Now, they will have to re-think their stance on India. Do you see this as a risk?
India is still among the best performing large economies in the world and one of the most-preferred in the emerging markets basket. So, when foreign funds allocate their assets, India would remain a major destination.
Besides, the Narendra Modi government has done significant reforms in the past year, which will help the economy in the medium to long term. If the government pro-actively clears the confusion around the tax issue, I don't think foreign funds will change their India strategy.
From being the best performing market last year, India is one of the worst-performers in 2015. Do you expect the underperformance to continue, given that markets like China and South Korea have turned attractive?
That will be a very short-term view. From a three to five-year perspective, we are still in a bull run. It will be wrong to say the
bull run has ended and a bear phase has started. India remains a bright spot in global investors' parameters, while many domestic investors who understand the inherent strength of the economy will continue to invest. Even this year, the markets will perform well, unless there is policy paralysis or a big global risk-off environment.
What near-term risks could hurt the market?
A below-normal monsoon and sharp rise in crude oil prices could play the spoilsport. If the government is unable to progress with the promised reforms process, it will hurt investor sentiment. The US interest rate scenario, any economic instability in the euro zone and possible geopolitical instability in the Middle East will be keenly observed.
When can one expect earnings revival?
In the next two-three quarters. If government policy initiatives are on track, the revival will be faster and robust.
Has the government been slow with reform?
Every time the market falls, the criticism gets louder that things are not really moving and corporates are still reeling under low demand and low margin, which results in low investment and fewer new jobs. But one has to understand that the government has done significant reforms in one year.
A significant vote of confidence, not based on sentiment or liquidity, came from Moody's, when they upgraded India's rating outlook. At the same time, one cannot ignore that corporate earnings and industrial productivity still portray a dismal picture.
Major policy reforms such as the land acquisition Bill or GST are getting stuck in political quagmire. The market is also disappointed because of the tremendous expectation and belief that a turnaround will be done in months. This has not happened. But there are reforms done and some are ongoing, which will lead us there in a couple of quarters.
Which are the sectors, stocks you expect to do well?
If one would consider the information technology sector, then stocks like HCL Tech, Tech Mahindra and MindTree look good. Among infra players, I believe road and railway sectors are seeing faster activity. Sadbhav Engineering and Simplex are to be watched. The cement sector has not done well recently but once the corrective phase fades away, you may look at stocks such as Shree and UltraTech.
Any sectors, stocks you would avoid?
I would at least personally not put money in any public sector bank at this point. If you have to play here, it is better to buy leading private sector banks.
