Gaurav Dua of Sharekhan is advising clients to turn overweight on consumer discretionary, IT services, Pharma and also gradual build position in leading corporate lending banks.
There is always a risk of fiscal slippage in a pre-election year. However, we believe the government intent is clearly to remain within the set fiscal deficit limits in 2018-19, though a lot would also depend on the GST collections going ahead, Gaurav Dua, Head Research, Sharekhan told Moneycontrol's Sunil Shankar Matkar.
Do you think we are near bottom of the ongoing correction? What is your overall view for rest of FY19?
It is not possible to give very short-term view and market levels based on fundamental analysis. However, anecdotal evidence shows that the correction in benchmark indices, Nifty/Sensex, has been in range of 10-12 percent from peak level in the past few years, despite events like US' first rate hike in decades in 2015, unprecedented move like demonetisation in 2016, and correction driven by global uncertainties earlier this year in 2018.
So, we do not expect sub-10,000 levels on Nifty at all. Our base case assumption is that the index could consolidate around the current level (in range of 500-odd points on Nifty) in near future.
Rupee has already fallen more than 13% to hit record low of 72.96 a dollar. Do you think it will see 74-75 levels soon? Is the rupee a bigger risk than crude and trade war tensions?
Rupee depreciation is largely driven by strengthening of US Dollar against all major currencies and pressure on rupee is part of the contagion.
Divergent monetary policies globally where US is unwinding low interest rates while other major regions like Europe and Japan are continuing with highly accommodative monetary stance is supporting rally in US Dollar.
Trade war is only adding to pressure on Chinese Yuan, in particular and emerging markets in general. We expect the rupee to remain under pressure in the near term despite the expected intervention by RBI and the government efforts to curtail trade deficit.
This would keep the upside limited in equities. However, it is likely to result in buying interest for export-driven and import substitution-led companies.
Do you think the government will be able to achieve FY19 fiscal deficit target?
There is always a risk of fiscal slippage in a pre-election year. However, we believe the government intent is clearly to remain within the set fiscal deficit limits in 2018-19, though a lot would also depend on the GST collections going ahead.
Petrol and Diesel prices have been hitting the roof everyday. Will it create inflationary pressure? Is there any chance that government can think of including petrol and diesel in GST?
The government has rightly stuck to fiscal prudence rather than compromise on reforms due to political compulsions. We believe that the onus on providing relief to consumers is also on state governments through reduction in value added tax (VAT) on petroleum products.
The state governments have fiscal space to take VAT cuts as rising crude prices is expected to lead to additional tax revenue of Rs 22,000 crore to state governments.
On the other hand, the rising crude prices does not add to tax kitty of central government. Some of the state governments like Rajasthan, Andhra Pradesh, Karnataka and Bengal have reduces state levies on petroleum products and the other state governments could follow suit.
General elections 2019 will be the next big event. What are your expectations?
We have seen that the equity market celebrate stable government at Centre and any new formation with clear mandate would be good news for the equity markets.
What are the sectors you like in current correction?
We are advising clients to turn overweight on consumer discretionary, IT services, pharma and also gradual build position in leading corporate lending banks.Despite valuations, we continue to remain positive on the structural growth story in private sector banks, insurance companies and bottom-up picks.