Nilesh Shah, MD, Kotak Mahindra AMC believes that market will be focused on economic reforms rather than populist measures like providing freebies to win elections.
Sanjay Dutt, Director, Quantum Securities too believes the government will remain focused on development and economy.
When asked to gauge the market reaction to the exit polls outcome of a BJP win in Uttar Pradesh, Shah says the actual resultsmany a times have been different from exit polls. So, Tuesday would be a better day to gauge the market move, post the actual outcome of election results, he adds.
However, if BJP does win in UP then it will reassure people that thrust of the government towards economic reforms will come through because of more majority in the Rajya Sabha, which until now was proving to be a hurdle.
Dutt says in case the results in UP are beyond consensus thenmarket is sure to rally 100-200 points.
Shah believes the biggest risk for the market remains earnings growth.
Below is the verbatim transcript of Nilesh Shah and Sanjay Dutt's interview to Latha Venkatesh, Sonia Shenoy & Anuj Singhal.Latha: The possibility of the exit polls is that there is an outstanding majority for the BJP or the reiteration of the party and its ability to get into the warp and woof of the electorate. How are you reading this and the impact on investments?
From our point of view it is critical that we should be driven by economics and reforms rather than by populist measures and fortunately in most part of the state elections, bearing few small incidences here and there, majority of the party focused on jobs, development and growth rather than farm loan waiver or giving freebees like laptops and cycles etc. So at least market will be looking forward to pushing of economic reforms agenda, and with demonetisation we have a great opportunity where along with GST and demonetisation combined we could see economic activity picking up with better revenues to the government, better integration of formal and informal economy and that push economy higher and if economy grows market will follow.Latha: Do you expect
only market to follow or do you think that they will start pencilling in a strong sovereign right now - that is the most important question. Come next week, on Tuesday, do you see the market start pencilling in if what the Chanakya polls say actually happen? Shah:
In the past we have seen that many a times actual results have been at reasonable variants to the exit polls, so market while keeping an eye on exit poll will actually make the movement after some trends are available in the actual results. So maybe rather than today, Tuesday will be a better gauge for the market mood and yes, market will be looking forward to the government now pushing further on the economic reform side especially GST smooth rollout is critical. Sonia: What do you do now in the market because there are global cues to reckon with as well, we have a big Fed event coming up, the dollar index has started to surge yet again. How would you marry all of that in with our own domestic liquidity momentum? Shah:
One thing is that globally if there are one event like US Fed where the interest rate will be raised in this Fed policy meeting, against that we have seen reasonable reduction in crude prices, West Texas Intermediate (WTI) fell below 50 after a long time and Brent has also come down to USD 52 per bbl. Our Budget has provided oil at about USD 55 per bbl, so to that extent we get some comfort. We have also seen statements from European Central Bank about their economy in a reasonably stronger position, threat of deflation out and the liquidity continuing. So against Fed we have seen two positive movements of oil and ECB and my guess is that today the Indian markets are driven by domestic flows and what happens on the corporate earning side. By and large December quarter results despite demonetisation has been little ahead of market expectation and the Q4 mood of the market is that the results will be higher and the earnings growth which is only happening in pockets of the market, should now become broader based. Anuj: What is the risk for this market because we have had a one-way rally from 7,900 to 9,000 and this market is not cheap now? Shah:
The biggest risk for the market continues to remain earnings recovery. If we see BSE 200 for FY16, 101 companies within those 200 delivered almost 32 percent earnings growth. Now similar trend is continuing in FY17 as well. So in the pockets of market which is showing robust earnings, we extended to the broad market. Could we see PSU banks and metal companies which didn't deliver great profit growth and in fact dragged down the overall market profitability growth, could they turnaround and certainly that turnaround is not going to happen for PSU banks in the month of March quarter because of the rising yield but can 2018 financial year will be different compared to 2017 and 2016.Latha: Do you expect the market to put aside the earnings worries because we are in for more definite terrain in terms of policymaking or do you think the market will wait? What is the range? Do you think it will meander at a higher range probably 9,000-9,200? What is the trajectory for the market over the next couple of months? Shah:
The momentum is fairly positive, flows have been fairly strong and the foreign institutional investors (FIIs) which provided supply of shares from November 8 till January 31 have now joined the party along with domestic investors from February 1 onwards. So with so much of money chasing, so few shares and we have seen what happens when a quality initial public offering (IPO) comes, the lending book of the non banking financial companies (NBFCs) for IPO financing starts growing rapidly. So that shows the appetite for equity by domestic investors and if the foreign investors are not going to supply then prices will remain supported. Sonia: A word on the point you were making
earlier, if BJP
win the elections in Uttar Pradesh. Does it change the economic policy landscape in any way because their policies are already established, right, its thrust towards social sector
etc. So should we expect any kind of change? Shah:
At least market will start believing that now potentially they will get maturity in Rajya Sabha over a period of time and that means some of the law making which was not possible because they lacked majority in Rajya Sabha will be possible. Overall the thrust of the government continues towards economic reform side and that is what market will be looking forward to. Anuj: What kind of stocks will lead the market? Over the last one month Reliance Industries has lead the market and some of the old economy stocks have come back and they are taking over the leadership. Your sense of what kind of stocks will lead the market now? Shah
: Today we are in a situation where broad larger term theme which is developing is shift of unorganised sectors to organised sector, shift from small and medium enterprises businesses towards larger enterprises businesses. Partly this is happening because - one, India is becoming brand conscious and even in small and medium enterprises brands can be created but the larger brands will be created in listed large enterprises. Second, demonetisation has disrupted cash trade channels; movement of cash to that extent has become difficult and hence businesses are moving towards formal sector of economy. Third and the biggest boost to this trend will come from goods and services tax (GST) where arbitrage of tax for becoming competitive business will become difficult.
All these trends, the brand, the demonetisation in GST will push businesses towards larger enterprises and I am qualifying them as listed enterprises purely from a stock market point of view. This is a time to capture. It is across theme it can be played through building materials, auto components; it can be played through chemicals and speciality chemicals, garments and textiles. You have a larger sector choice available but this is an underlying theme to capture upon.Anuj: We make a lot of noise about elections, the only time it really mattered was -- last time it mattered of course was in 2009. After that we haven’t really seen elections having that kind of an impact on the market. However, do you think this time it could be different, your sense of if the exit polls do translate into actual event, would we have a decent rally? Dutt:
I don’t think so. I think maybe a day or two, 100 points odd here and there, or 200 points maybe, but beyond that nothing. If you go back and see Delhi elections, you go back and see Bihar elections, even in Bihar for instance, the ruling party had put a lot at stake. Delhi, no one expected the result if you go and rewind your memory. The important point we need to realise is that these are just small bumps on the way; the broader picture is that the government is clearly focused on development, economy, and a whole lot of other things.
Yes, in the short-term, this would have an impact, we may go up 100-200 points in case we get a victory beyond what the consensus polls are, that is about 210-211 and even there my sense is that the polls have been conservative. If we do get a BJP victory, it will not be in 205-210 region, it will be in the 250 plus region. So, if that be the case, we will probably get a 200 point rally because most of the positives of BJP winning are in the price right now. If we get a surprise that is BJP gets 160-180 kind of range, we are definitely set for a bigger crack down to 8,650-8,750 on the Nifty. Sonia: Now it seems to be a heady cocktail of positives, not just is the BJP moving with a quite a bit of strength, but you also have a lot of local domestic liquidity getting back into the market, so much participation in the primary markets as well. Do you think all of that put together could take our markets to new highs before the end of the first half of the calendar year? Dutt:
I think there is a very important point that we all are probably missing in our discussions this morning and that is the global equation. The flows, the dollar index, the oil price equation, what Mario Draghi said yesterday, I think those are very critical factors as well to see where our Indian markets are headed because easy liquidity, the risk-on trade, more aggressive risk-on trade, risk-on trade is on for a while for emerging market (EM), but a more aggressive risk-on trade, those equations I think will have a more important bearing than what really is happening domestically.
Domestically I think flows will continue to be positive because investors know there is no other option but to start, continue to put money into equity and balanced funds, etc. I think we need to keep an eye overseas and next week we have got the US Fed also, so, that is going to play an important role in the short-term direction of the market here.For entire interview, watch accompanying videos.