Himadri Buch Moneycontrol News
Sanjay Mookim, the India equity strategist at foreign brokerage firm, BofAML, is bearish on Indian equities for 2019, and advises investors to “stay away” from investing as he believes there could be a double-digit fall in the current calendar year.
Mookim believes that India is not immune from the rising global cost of capital which will impact Indian equities leading to a significant fall.
In a candid chat with Moneycontrol, Mookim averred that "devoid of ideas" to invest in the current situation he maintains that in the long-term, growth potential for India is intact.
He expects the market to correct ahead of the general elections and advises to look at bonds for investments instead of equities in 2019.
Mookim said if the present government does not get a clear majority then Indian equities will fall.
On midcap valuations, Mookim opined that mid caps are still trading at 80 percent premium to large caps and there could be a significant fall in mid-caps from here on.
The brokerage firm is overweight on financials and rural economy linked stocks.
In terms of corporate earnings, he said that banks are coming off the NPA (non-performing asset) cycle and are looking at large reversals. He sees a possibility of some large corporate bank reporting surprising numbers.
Mookim said that FII flows will largely be linked to emerging market sentiment.
BoFA ML expects two rate cuts from the Reserve Bank of India in 2019 given the benign inflation environment.
Excerpts from the interview:
Q) What are your expectations from the New Year?
There will be a correction in the New Year. I expect and I am worried about that. This is because I can see it happening elsewhere in the world. India is not islanded. We are not immune to the rising global cost of capital. We were benefitted when the cost of capital was falling. This is reversing and that is where I see we will get a correction in a reasonably expensive market that we have today. There is a possibility of double digit fall.
Q) If you are saying it will be a double-digit fall so what kind of stocks one should be looking at in such a scenario?
Investors need to have stocks which are growth and reasonably valued. Today no growth stock is reasonably valued. So more than the level of the price, I would argue that PE (price-to-equity) needs to come down significantly.
Q) Do you think there is a nervousness in the market just ahead of the elections?
No. Not yet.
Q) How will markets trade ahead of the general elections?
What I am hoping for is there will be a bit of correction ahead of elections and then there is some reversal to normalcy. India is that kind of market, if you get something cheap, you buy because long term potential of the economy is intact. We have hiccups in the market as market do not look at the long term it always looks at the short term. So, the risk of the correction is reasonably significant
Q) How would markets react if the present government doesn’t get a clear majority?
People more worry about the stability of the government rather than the form of the government and for whatever reason coalition is perceived to be stable I believe the market will be fine with it. Whether it is this set (BJP government) or another. It is just the instability that people worry about. It will not matter for the economy even if you have an unstable government in Delhi. Does it really change the business cycle of the country? Probably the answer is No. Markets will react, stocks may fall. If they do I will come and say buy because they have fallen for the wrong reason. But it is likely that uncertainty in Delhi will lead to some correction in stock markets.
Q) Earnings season will kickstart on January 10 with TCS and Infosys announcing their quarterly results. How do you think corporate earnings will pan out?
It will be devoid of fireworks. There are some base effects. There are some companies which had a very bad quarter in December last year. They will therefore report optically good YoY growth but if we strip out some of that there is nothing spectacular expected in this quarter. We have already started to see earnings downgrades for this year. In fact, in the September quarter, there was the largest downgrades to corporate earnings that I have seen which is unfortunate. I do not see any more downgrades now.
Q) Any particular sector that can surprise us?
Focus from the market point of view will also be on banks because they derive the largest set of profits. Banks are coming of the NPA cycle and are looking at large reversals. It is a possible that some large corporate banks report surprising numbers. People will focus more on that. Also, some auto discretionary companies will always have some volatile numbers.
Q) Which are the sectors that you are betting on in this year?
We are overweight on financials and we are slightly tilted towards the rural space because the government has already provided a lot of support to rural income and that would include some two-wheeler names, staples, tractor names.
Q) After the recent correction, do you think it is time to look at small and mid-cap stocks?
Which correction? Worst is yet to come. The reason I say this is that the multiple is still very high. If it goes from 60 times to 55 times in a month, that is not correction. In three months, the multiple had gone to 40 to 60. More than price levels, the valuations that need to get back in line and we are still far away from that.
Q) Does this mean investors should stick to large caps and avoid midcaps?
Yes, stick to large caps. Large-cap stocks have halved in multiples yet investors are not buying them. On the down side, midcaps will probably fall more because there is a higher beta space. Midcaps are still trading at 80 percent premium to largecaps. Midcaps have corrected but they are not cheap enough. Mid aps are not in the right place yet. Largely, midcaps are driven by domestic sentiment. Election will bring in volatility and hit domestic sentiment
Q) Do you think the recent friction between the government and RBI is a worry factor for foreign institutional investors (FIIs) who were betting on India?
Not yet because at least RBI had to inject a little bit of liquidity in the system which was probably needed. Most are looking at the benefit for what the RBI is now doing rather than the fact that the government may have intervened.
Q) How do you see FII flows in 2019?
It will remain linked to emerging market sentiment. Flows driven by India depends on what happens in the emerging markets. Correlation is very high and if you see the inflows in to Ems (emerging markets), we have inflows in to India. But for whatever reason emerging market sentiment remains weak then India will also suffer because of that.
Q) Will RBI cut rates in the coming months?
Yes. We think so. Given the benign inflation environment, we expect two rate cuts from the RBI this year.
Q) Lastly, what is your advice to investors?
Stay away from equities, look at other opportunities. May be invest in bonds.
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