Feb 23, 2016, 03.34 PM | Source: CNBC-TV18
In an interview with CNBC-TV18, Devendra Joshi, Equity Strategist at HSBC said that he continues to be underweight and defensive on Indian market as growth and earnings continue to be a worry.
Devendra Joshi, Equity Strategist at HSBC says he continues to be 'underweight' and defensive on Indian market on worries over growth and earnings.
Adhering to the fiscal consolidation is very important for the Finance Minister, Joshi says in an interview to CNBC-TV18.
"Earnings revision is kind of key than the Budget," he added.
Joshi continues to be positive on consumer staples and healthcare, whereas, he expects financials to underperform with the exception of retail focused private banks.
Below is the verbatim transcript of Devendra Joshi's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Sonia: Foreign institutional investors (FIIs) have been big sellers, more than 20,000 crore since the start of the year. What is the sense you are getting before the Union Budget. How would you be positioned in a market like India?
A: The thing with Budget, as we always maintain, is a lot can be done outside the Budget and a lot within the Budget might not actually happen. We will see how the Budget goes but until then we are defensive on India because of couple of things. We see that the high gross domestic product (GDP) numbers are not reflected in the underlying soft indicators yet and even after that we see that the earnings expectation is quite high at around 18 percent for this year. So this number will have to come down. This means that even if market is where it is and earnings expectations come down, we do not see any PEs getting down from here and it is important because India is still trading at around 40 percent premium to the region. A part of it could be attributed to better macro position because of lower oil prices etc but we think that earnings division is the key rather than the Budget for the market overall. However, for Budget, what would be positive for equities, if the finance minister sticks to the fiscal consolidation target and also if provides funds for selected areas for growth.
Latha: Ultimately the ability of Indian markets to perform will also depend on how the global markets perform. What is your global team telling you? Are global cues stabilising at all after rocky 2016 start. Last two weeks were a bit placid?
A: Yes. For global equities, we definitely see sort of reassurances which have come up from Bank of Japan or European central bank (ECB) and that should have calmed some of the nerves and also last week or so we have seen that the China's central bank Governor has come out with an interview and he has given some sort of reassurance which definitely would reassure the investors but having said that Asian equities in particular, we need to see few things playing out before we can see a trajectory on the upside. However, we need to see that the Chinese policy has to be more proactive because of the issues going around in the china slowdown. We also need to see earnings growth in terms of fundamentals and the latest round of earnings that we have seen around Asia doesn't give us that kind of confidence yet.
Latha: Not positive on Asian and emerging markets at this point in time?
A: Not really.
Latha: When you say that is a must in the Budget - does HSBC want 3.5 percent, does it want 3.6 percent. What is forgivable?
A: It is difficult to say what is forgivable and what the range is. As I said Budget is sort of a statement of intense, so we need to see what comes out of it, but having said that why fiscal consolidation is important for equities is - there are three reasons. One, confidence is a bigger driver of financial markets other than growth and if the government does not stick to its own targets, it will be negative sentiment. Second, higher deficit will also lead to higher government borrowings which would push up higher bond yields and in-turn equity premium as well and third, it would also reduce the scope of further rate cuts. So from equities perspective if they let go fiscal consolidation, from my perspective it would be negative.
Sonia: In terms of stocks and sectors, which are the sectors that you would be most bearish on now and on the flip side, which are the sectors where there is still some amount of comfort?
A: In terms of sector positioning, we would want to go for sectors which have higher margins and which are defensive because on the regional context we are underweight India. So the sectors which we are positive on are consumer staples because we think that's better and healthcare; there are still high margins, utilities, the valuation is still low there and on the negative side we are underweight on sectors like material and industrials given we do not see any capex recovery yet in India.
Latha: Which of the financial would you like?
A: We are underweight on overall diversified financial but we prefer private sector banks especially which are geared towards retail lending