BNP Paribas expects euphoria on the Street if BJP wins in UP

A BJP victory in Uttar Pradesh assembly elections will lead to euphoria in the market, despite the Street factoring in the party's win, said Manishi Raychaudhuri of BNP Paribas. Sensex is likely to touch 30,300 points by the end of 2017, he said.
The market has continued to move upwards in spite of an earnings downgrade in the third quarter, he said. He, however, cautioned that the market may consolidate in the short-term. 

"Valuation in the Indian market need some compression," he said.
He said any correction going ahead is going to be a great buying opportunity. Even a slight correction in the market will make it more attractive.

He holds a positive view on the consumer discretionary space, especially the auto sector. He also likes the banks that cater to retail customers rather than corporate. He is bullish on consumer staples as well. 

He opined that the US Federal Reserve will raise key rates at least thrice in 2017. The first rate cut, he said, will come this month. In 2018, he said the Federal Reserve will raise rates four times. Below is the verbatim transcript of Manishi Raychaudhuri’s interview to Sonia Shenoy, and Surabhi Upadhyay on CNBC-TV18. Sonia: Has the market priced in a BJP win in the state of Uttar Pradesh or do you think if the win comes through tomorrow, there could be more to go on the upside as we head into the next couple of weeks? A: First of all, I think going by the reaction of the market today in the wake of the favourable exit polls, it seems a lot of this positive news is already factored into the market. If you notice how the Indian market moved up and continued to move up even in the face of earnings downgrades that were coming through all across January and February, it obviously means that the market has been significantly re-rated. It is the valuation that has moved up significantly, both compared to its own history and in relation to its Asia Ex-Japan peers. So, this re-rating obviously was partly due to the sentiment boost that was coming across as a consequence of the continuous feedback that we were receiving from on the ground that the ruling party is likely to do well in some of these key battleground states. So, I think that partly explains why the market is flat today, even in the wake of these positive exit poll results. So, after the results are out on Saturday, while initially there could be kind of a sentimental euphoria if the ruling party really does well because it would obviously indicate a continued reform momentum and the continued ability of the government to cut down on fiscal deficit and expand on fiscal discipline. I think then the focus will again come back into two things, number one, how the earnings environment develops in India and secondly the global scenario which I think the Indian market has somewhat ignored in last few days. Surabhi: Is the risk reward now favourable towards the Indian market? A: I think in the short-term, I would possibly expect some correction in India. In fact the valuation premium that Indian market trades at compared to Asia Ex-Japan, is almost about 50 percent right now. On a forward price to earnings (P/E) basis, India is approximately 17.5-18 times while the average of Asia Ex-Japan is about 12-12.5. So, that valuation has to compress, that valuation premium has to come down. That can obviously happen in two ways, either by India correcting, or by India staying where it is while the other markets in Asia outperform. However, the one implication of this is clear that the valuation premium has to compress, so, at least on a relative basis I would expect some correction in India. I don’t think it will be very severe, but any correction would obviously provide a better opportunity both to the foreign portfolio investors and the domestic institutions to re-enter. Sonia: We keep talking about the domestic market but one thing we are ignoring is the global risk, right? How high is the global risk right now with the way the dollar index and the bond yields have been surging lately? A: The DXY and the bond yields surged right after the indications we received from the Fed that there could be an imminent rate hike in March. In fact we currently believe that in 2017 there could be three Fed rate hikes, followed by possibly four in 2018; that is our global economists belief and the first one is 2017 could be as early as March. So, I think earlier most economists were arguing for a May rate hike and possibly just about two in 2017, but that outlook is clearly changing. So, that was at the back of the expansion in DXY and the increase in the bond yields that we have seen. So, that is one of the reasons why over last one or two weeks the Asian markets themselves have corrected. We saw MSCI Asia Ex-Japan at 569. Over last few days, it has corrected back to about 559 or so and we think that this might continue for some more time. Secondly, we also have to keep in mind that during this period from March to June, we are likely to have quite a few important European elections and if the kind of outcome that we saw in Brexit in June 2016, if similar outcomes get repeated, then the concern about the sustainability of the euro, etc. those concerns would again come back. Whenever this happens, we see a kind of a reversal of flows back into the safe haven destinations and emerging markets obviously get deprived of the flows. So, that is something we have to watch very closely. Surabhi: Where does your interest lie in individual sectors now? A: In case of India, as I have been saying on this forum, there are three or four silos that we like. First are the consumer discretionaries and select few consumer staples particularly the ones that benefit from rural consumption upturn. As far as consumer discretionaries go, our preference lies for the auto segment particularly the four wheelers. The second silos are the private sector banks particularly the ones that are focused on retail lending, not the one so much focused on corporate lending and finally some select few investment beneficiaries even though we are still not seeing private investments coming back in a big way. We think that industrials particularly the deleveraged industrials and a few cement stocks and maybe a few in the power distribution and transmission space, there are a few pockets like these that deserve investors’ attention. So, that is where we would really focus on as far as our India basket is concerned. Finally we are not taking our foot off the pedal as far as the Indian IT universe goes entirely even though the concerns about the H1B visa laws remain and they will possibly continue to impact sentiment on this sector for the foreseeable time horizon. However, we also think that after this massive correction that the sector has suffered, the valuations look attractive and these companies are huge cash generators which are enabling many of them to enhance shareholder value by buybacks and larger dividend payments. Sonia: What is your year-end target for the Sensex now and how much growth do you see from now say until the end of the year? A: We have a Sensex target of 30,300 by end of calendar 2017 which means possibly about 6-7 percent from here over close to 9.9.5 month time span. So, on an annualised basis that is not really much, maybe about 8-9 percent. If the market corrects slightly, it becomes all the more attractive to get into the market at that point of time.