We see a limited possibility of a major fiscal stimulus as the government would have to walk the tightrope of restraining the deficit while boosting growth.
We would play the market rally through the Indian consumer, financials, autos, real estate, and select consumer staples, which will be our picks in the market at this point, Arbind Maheswari, Head of India Equities - Sales Trading, Bank of America Merrill Lynch said in an exclusive interview with Kshitij Anand of Moneycontrol.
Q) The RBI maintained its status-quo stance this time and reduced SLR by 50 bps. Do you see a stimulus or a rate cut happening in 2017?
A) We see limited possibility of a major fiscal stimulus as the government would have to walk the tightrope of restraining the deficit while boosting growth.
Media articles have suggested to the government’s intention of maintaining fiscal prudence and the RBI has signaled its reluctance towards a stimulus as well.
We do, however, expect the RBI to cut rates by 25bps in its December policy meet. The RBI governor struck a dovish tone at this week’s policy revising its GVA estimates lower, while also increasing its CPI trajectory.
Given this backdrop and the need to stimulate growth, we expect RBI to cut in December before the busy October-March industrial season.
Q) The 1HFY18 is over and the S&P BSE Sensex rose just over 8% and for the year it has gained a little over 20%. The large part of the rally was led by small and midcap stocks. What is your view on the broader market should investors book profits in small & midcaps stocks?
A) The year 2017 has been a solid year for equities globally and India is no different. 2017 has also heralded an era of immense liquidity driven by the solid growth in domestic asset management industry.
This liquidity has made parts of broader markets expensive with earnings not commensurate with the price action. Also, visibility on earnings remains hazy for many of these overvalued names.
Having said that, one can still find pockets of growth and visibility but the overall broader market remains expensive and in parts over-valued.
Q) Slipping macros is something which is troubling market participants at the current juncture. Do you think this will cap upside for Indian markets or these fears are unfounded?
A) Concerns on macro have been an issue as earnings recovery has been evasive for the past few quarters. However, we believe, these concerns should diffuse.
The 2H FY18 should see earnings rebound as GST restocking occurs and the economy comes around and settles into the new regime.
Also, the December quarter will benefit from the low-base effect of demonetisation last year. In addition, we should get better rural spending post a decent monsoon.
Q) What is your call on the rupee? Do you see it heading towards Rs70/USD in near term?
A) Our house call is that INR could depreciate further from here. Our FX strategists see 66.75/ USD by December 2017.
Q) September quarter earnings from India Inc. It has been a mixed bag, so far. Do you expect a recovery in earnings in this quarter?
A) The September quarter should see a mild earnings recovery led by growth in automobiles and financials. A revival in consumption will be leading earnings recovery.
As mentioned earlier, we see a larger recovery in the December quarter as the economy revives from special economic events amidst an environment conducive to consumption.
Q) What is pushing foreign investors away from Indian markets? They sold about Rs11000 crore from Indian equity markets in September.
A) We believe foreign outflows are a factor of relative earnings visibility and valuations. Lack of earnings recovery for the past few quarters and relatively expensive valuations have gone against India.
In contrast, markets in North Asia and other emerging markets have seen a much stronger set of earnings and we don’t see any signs of earnings downgrades there.
As a result, rotation of foreign money has been witnessed from India into some of its other peers. However, we think it is a matter of time before this trend reverses as the recovery process gains ground.
Q) Top sectors which will lead next leg of the rally on India markets?
A) We believe that consumption is going to lead the recovery in the economy and not investment. Capacity utilization levels are still low in the economy and hence we think an industrial revival is still some time away.
We would play the market rally through the Indian consumer. Financials, Autos, Real Estate, and select Consumer staples will be our picks in the market at this point.
Q) What are your expectations from the index and rupee till next Diwali? Do you have any specific level in mind?
A) We are cautious in the market near term. However, as the reforms start to take hold and a lot of the implementation issues get sorted, the Indian economy will deliver on growth in the medium to long-term.Hence, we are still quite bullish on the markets from a longer-term perspective.