2016 to be a good year for equities; like infra: Jaipuria

Independent market expert, Jyotivardhan Jaipuria believes that market may not see an year-end rally this time around but 2016 would prove to be a good year for equities because the economy is slowly bottoming out, adding that one could also see some positive earnings surprises in 2016. One could see double-digit growth in earnings from H2CY16.

Earnings surprise could come from consumer durables on back of interest rate cuts and 7th pay commission coming through, and infrastructure stocks on back of government spending on roads. They could witness an improvement.

He is also upbeat on the cement sector and infra related defence plays. According to him the domestic story which had not picked up pace until now, will do so. Therefore, it could be more of domestic oriented story.

Globally, he says China is still a concern and we could see more devaluation from there in an attempt to slow their economy. Meanwhile, the Fed rate hike next week could take the uncertainty out of the market.Micaps in the near-term might see some pain but over the longer-term, for the next two years they will perform better than the largecaps. However, whenever the market corrects or gets nervous, midaps tend to come off faster than largecaps.Below is the verbatim transcript of Jyotivardhan Jaipuria’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: This is looking a fairly steep fall and a widespread fall that we are seeing. What does it look like, towards the end of the year are we going to look at 7,500 getting breached? A: Typically the year-end is always very good but this time we have this Fed overhang on all markets globally and I think till that event gets over, we probably will see markets being nervous. It is possible that once we actually have the Fed hike coming through then markets celebrate a bit saying the event is out of the way. Latha: It doesn’t seem to be only the Fed hike, isn't it? There is a second round of commodity slippages that we are seeing over the last one week. Crude took a plunge 6-7 percent lower since the Friday Organization of the Petroleum Exporting Countries (OPEC) meet, yesterday it was followed by iron ore and a few other commodities. Will there be another growth scare round of falls? A: I think the growth scare is not disappearing even though – yes the Fed sees the US economy doing very well. I think China is still going to be a concern not just for this year but for the whole of next year. In fact, if you look at the last time we had market being very wobbly, it was on the back of a Chinese devaluation. I think we will start getting fears next year again of will there be a currency devaluation, a round of competitive devaluation where China devalues, everybody else devalues. So, I think that fear is not going to go away. It is not like a three month thing, it is probably going to be a one year or two year phenomena where China continues to slow its economy and if the slow is much more than what they anticipated, they probably will take measures like devaluing their currency. Sonia: So far this year, the story lay in the midcap space but now we are seeing a lot of midcap stocks unravel quickly. How do you approach midcaps now? A: If you see, the largecap indices are close to the lows they were towards August but the midcaps are still well away from those lows. I think if we see the midcaps, typically they tend to hold up but when we see markets starting to get nervous, they come off much faster than what the largcaps do. So, probably so far you have seen the midcaps hold on and now you are starting to see some of them come off or unravel. Midcaps are expensive, so, they are not cheap so that we have seen that they are expensive relative to the largecaps. I would still say over the next two years the midcaps will do better than the largecaps but near-term I am a little concerned about the valuations in the midcap space. Latha: If you have to hide in equities, where do you hide for 2016? A: Though I don’t like the market near-term, I think 2016 will be a good year for equities. Actually, I am feeling more comfortable on the economy than what most people are and generally I am very bearish but I think the economy is actually, slowly starting to bottom out and will probably show a turn towards the positive side in 2016. So, we will see a nice rally. I think for a change, earnings as we head into second half of 2016 will show double digit growth and they will actually show double digit growth because so far we have seen analysts forecasting double digit growth and the growth never comes. So, I think we will get an earnings surprise in 2016; it will be probably back-ended but I think that will make 2016 be a good year for equities. Sonia: When you say earnings surprise, which sector do you see the earnings surprise come in? A: We will see the consumer especially the urban consumer do well as a consequence of interest rate cut as well as the pay commission. I think we will see some of the infrastructure stocks start to do well also because there has been sustained activity in roads, in railways and in defence now. So, some of this will start translating into numbers as we go into 2016. Probably a year from now, we will start seeing some improvement come over there. So, I think once the topline starts to improve there, the margin increase will be quite sharp because the operating leverage will kick in. So, I think we will get a combination of improving topline and improving margins in lot of the domestic oriented stocks for next year which would start to mean that earnings probably actually will end up next year at 12-15 percent growth. Latha: Is it only consumer durables or maybe FMCG is that you will look at? A: It is like the urban consumers and like I said, infrastructure, some names will also start to do well. So, we will probably see pick up coming through in cement because that has been one story which a lot of people played for the last two years but we have never really seen that pick up coming. So, cement will actually pickup, I think we will have some of the infrastructure which are more geared to roads, which are more geared to probably defence start to do better. So, there will be a lot of domestic names which will start to do better. I think the domestic story was something which was just not picking up though there was some hope last year in the stock market so that will actually start delivering probably in the second half of next calendar year.