Corp credit cycle may bottom out sooner than later: Kotak UK

With Nifty returns being sluggish and broad-based recovery remaining elusive in equities, the midcaps segment market will remain in focus, according to an expert. Factors such as GST structure and its implementation will centre the focus of the market to midcap segment and the segment will remain more constructive despite a valuation gap between midcap and large cap stocks, said Nitin Jain, Principal Investment Manager at Kotak UK.Jain added that there are strong tailwinds in sight for private sector banks as they're gaining market share. Corporate banking space could look up but it is very early to say when the asset quality issue will be out of play, he said, adding that Kotak UK is favouring corporate lenders because it expects bottoming out of corporate credit cycle to happen sooner than later.Jain added that Kotak UK is underweight on IT services and utilities.Below is the verbatim transcript of Nitin Jain’s interview to Anuj Singhal & Sonia Shenoy on CNBC-TV18.Sonia: How are you approaching this period for now until the end of the year?A: Diwali in the US is going to be postponed buy a week. So, next week is going to be very interesting there, so let us hope there are no major fireworks there. We will be watching out what is going to happen in the festive season from a local perspective. Is it demand finally going to be better than what we have been expecting so much so far? So, far there has been very elusive broad-based recovery. We are hoping that the recovery kicks in this month and the coming months. That will be prime on our agenda to watch out for growth buoyancy from here on. Anuj: What is the slightly medium term outlook for this market? It has been stock specific market which has now being testing patience at the Index level for some time now. Do you expect that to continue?A: The market is going to be more stock-specific and in the last two years it has been a very stock-specific market. The broad indices have not done much. If you look at year-to-date (YTD) and if you look at one-year performance of Nifty, it has barely moved. At 7-8 percent kind of Nifty returns for a year as a whole it has been very sluggish. The mid-market will remain in focus, we will have more and more views and news about goods and services tax (GST) and what is going to be the final shape and structure of GST and that will keep the mid-market space in particular much more interested space to be in. If there is a broader recovery in the economy, we will have consumption-related sectors which are again domestic-facing businesses which will again see more interest. So, the mid-market space will remain more constructive while there are obvious issues about valuation gap between mid-market and the largecap space, I think that valuation gap may stay and there could be still more interest in a mid market space if the GST structure is good and if there is a recovery in the consumption trend in the market.Sonia: This year in 2016 the private sector banks have done the best as far as returns are concerned? Stocks like YES Bank up 75 percent, do you expect a repeat of that performance next year and will you also look at some of these more corporate focus banks names like ICICI Bank etc?A: If the banks do what they did, if the YES Bank does or some other bank does what it did in the last one year they would all be trading at HDFC Bank’s valuation. So, I don’t think that we can have a repeat of a similar kind of growth that we had. However, of course in our view these are all compounding stories. There is a very strong tailwind for growth for the private sector banks. They have a fairly small market share at this stage and they are increasing their market share, they are gaining market share. What is very interesting is that they are even gaining their current account saving account (CASA) at a meaningful pace than the traditional CASA holders. So, from a private bank space it will remain a compounding story for us. Yes, corporate banking space could look up. It is very early to say when the asset quality issue will be completely in the profit and loss account and in the balance sheet. However, I think from hereon we are more favouring the corporate lenders because we see the bottoming of the credit cycle happening soon than later. Anuj: What is one area that you would completely avoid in this market going forward?A: There is nothing that one can completely avoid. One has to be very opportunistic if the market is ignoring or avoiding some segments. You could find good value there, so there is nothing as a fund manager I would look to ignore. One can be underweight some segments in the market one can be overweight but there is nothing that I can ignore. So, clearly the areas that we are underweight at this stage is IT services but we are seeing some value emerging there. We have been underweight utilities, that has not worked so well but I think we can look at that space again. Metals is something that we missed out, clearly that could be the space where possibly we still could be avoiding given that there has been a significant run up in the entire commodity basket we could possibly be avoiding that space at this stage. Again as I said we are not ignoring anything, but we are just watching it very closely. Sonia: I wanted to get back to that topic about the big cues lined up. The US Presidential elections, my guess is as good as yours but what about the FOMC because the expectations are that there will be a rate hike in the December policy and not in the November policy? If the rate hike comes in do you see a big de-railing of emerging markets?A: I don’t think so, 25 basis points is baked in. You look at the 10-Year G-sec yield globally they have hardened so clearly a 25 basis points rate cut is possibly factored in. The big debate is whether it is the rate hike or a rate cycle. We believe it is more like a rate hike than a rate cycle. So, in that context this rate hike is more or less done whether it is November or December it is anybody’s guess more likely December than November. However, as long as we don’t see that turning into a rate cycle it is okay. On the other thing the rates have hardened a bit, the yields have hardened a bit and there is this view which is again coming up that given that there is a yield hardening globally will emerging market take a knock because of that. I don’t think so.don’t see too much of reallocation of assets which has happened in the last two years as it is towards emerging market. The growth differential still remain very significant between emerging market and developed market. So, it is going to be watch very carefully, but I think it is more like a rate hike than a rate cycle.