Neelkanth Mishra, head of equity strategy India, Credit Suisse, says that they advise investors to book profits in some sectors. Even if the broader market does well, sectors like industrials, large infra capex focused companies and banks with high NPA issues are likely to under perform.
Below is the edited transcript of his interview to CNBC-TV18.
Q: In last few months, you have been quite cautious about the market. Are you still sticking to that stance or do you think something might change around with the trend?
A: We have been talking about big rally but we are cautious on particular sectors. We maintain that foreign flows will continue. We are advising investors to book profits in specific sectors. We are cautious on industrials, large infra capex focused companies and banks with high NPA issues. Even if the broader market does well, these sectors and stocks will under perform. The broader market can remain quite strong; it is a reflection of what is happening globally.
When we compare India's performance in the top-50 markets globally, India has only done well in January and September. In October, we were at 47 out of 50 markets. In November till yesterday, we stood in 20's.
There is a lot of liquidity coming into the market and people are chasing those assets which they hope will give them better reach. I think this rally can hold on for the broader market. We can take a call on which sectors we want to invest in. We remain very cautious on the infrastructure sector.
Q: Do we have a making of a new bull market for next year. Or with the changed portfolio stance it is too early to call it a bull market making. What is your view?
A: With the amount of liquidity now available and the pressure that fund managers globally have seen especially with longer term investment funds, pension funds, insurance funds, sovereign wealth funds, allocation to equities is likely to continue. From this prospective, there are chances that some sectors may see new highs. Consumption on the whole should stay quite robust and strong. Last week we had published a note which showed that rural wages in September, despite weak monsoon, was up 11 percent over March 2012. There has been significant rise in wages of blue collar workers.
For example, a Coal India worker in last five years has seen a wage increase of 14 percent CAGR. Whereas software engineer who represents white collar workers, has seen flat salaries in the last five years. For the entry levels workers the salaries haven’t changed. There is a strong trend in consumption which will drive job growth at small levels. For example, poultry companies are now doing billion dollars sales. So they clearly create jobs for wholesalers and distributors.
We maintain that the GDP will not dip below 5 percent. I expect the rupee to stay weak for next three-four years. Some of the exporters will do well. These sectors and segments will continue to excite and there will be new highs. We are also focused on industrials, large scale infrastructure projects. The excitement that we saw in the last two months is misplaced and they will see a correction.
Q: What is the view of your global clients, has some of the mood change been triggered by the kind of moves from Parliament and policy action and in that how crucial would news flow from that part be in keeping India afloat in the list of outperforming markets?
A: India really outperformed in September and after that we have been flowing along. In October we badly underperformed. For emerging market portfolio managers or even global portfolio managers, who are desperate to see ease, the fact that one country raises its hand and says that it wants to change. It may be because of politics, or being pushed against the wall, but at least there is a willingness to change and that has excited a lot of people. And you can see that in how the fund flows have been happening. For most of the serious India watchers, that is not the case.
The serious India watchers are people who have a long term view on India. When at least something happens, I haven't seen too much of an excitement but most people do expect that this rally will last. There is lot of liquidity and hope and it is a very potent mixture.
On reforms, according to our published note it can be seen that it takes six-eight years for any intent from the government to translate into meaningful economic impact on the ground. And from 2004 to 2012 if you just plot what were the economic reforms undertaken, there were very strong momentum from 1991 to 2004 and from 2004 to 2012 we saw a big lull. So that lull will hurt us for at least next three-four years. So we are negative on the infrastructure sector.
Q: Goldman Sachs talks about 17 percent upside for next year. A couple of other brokerages like Morgan Stanley have it at 25 percent plus. According to your note you expect FY14 growth to slip to 7-8 percent. With this type of growth expectations are you translating it into any kind of market returns one should expect going into next year?
A: FY13 earning were high at 18-20 percent when FY12 was approaching and that has already slipped to 11 percent and now for the whole year we will see at 7-8 percent. That hasn’t hurt the markets. On the multiple sides, at a very basic level, the value of money itself is changing. When one very large Japanese company bought a very large Indian pharma company, it was asked why they are paying such a high valuation. It was easy to understand the response ‘if you are seeing zero percent interest rates, it doesn’t make a difference if you see a return today or next year or five years later. If it is a decent business one should go and buy it.’
Globally, with the central banks trying to push away capital from their own countries, the currencies etc. The value of money itself is changing. Therefore, the expected growth is lowering and we keep paying higher and higher multiples. Fundamentally, the NPA problem will worsen.
The order books and margin profile for many large investment companies will come down. Our estimates for various metals are below 10 percent. We continue to see earnings cuts in these sectors. Upgrades will continue in IT and consumer stocks. Broadly, the margin growth will be 7-8 percent that does not in any way talk about what the broader market – Very few of us invest in the broader markets.
At least most of our clients are forced to stay invested so they are fully invested. What we can advice them on is which sectors to be in so that they can outperform the broader market. And those sectors are where we can add the most value. For the broader markets, we have to look at what the Fed and ECB is doing.
Q: What is your advise to your clients on the midcap universe? Do you think some quality midcaps have a good chance of outperforming over the next 12 months or would you stay with blue-chips in the sectors that you like?
A: One of the problems with the market right now is that most of the large liquid names are either too expensive or are exposed to the trends where we see a weakness like in metal stocks, industrial stocks and some large banks. On the other hand, the themes that we have been flagging, the great Indian equalization, structural changes happening to rural wages. The 50, is the new 40, that is how rupee in the mid 50’s creates new opportunities for the exporters and for import substitution. And most of those stocks are actually smaller midcaps, the stocks that are going to be direct beneficiaries.
A poultry company being of billion dollars, clearly find other poultry companies which are listed and if you can't you find agri-feed companies which are going to benefit from this with protein or edible oil consumption. We recently initiated on a midcap company which focuses on tiles and ceramics. So there are many interesting opportunities. India is growing at 5.5-6 percent, it will keep growing at 5 percent plus. And there will be very interesting opportunities, they just won't be on one side of the market which seems to have rallied quite a bit in the last couple of months.