India has a strong position vis-à-vis other emerging markets (both in terms of growth and external debt), and the fall in crude only strengthens our macro picture, said Alok Agarwal, Senior Fund Manager-Equity, DHFL Pramerica Mutual Fund
FIIs have been net sellers to the tune of ~$13.3 billion so far in 2018. This is the highest ever net sell figure by them in India in any calendar year as the previous high being $11.8 billion in 2008, Alok Agarwal, Senior Fund Manager-Equity, DHFL Pramerica Mutual Fund, said in an interview with Moneycontrol’s Kshitij Anand.
Q. Do you think that the recent bounce in the market was largely on the back of rupee appreciation and fall in crude oil prices, and the rally could well be short-lived?
A. Yes, it is largely true. The rupee touched an all-time low against US Dollar on October 11. Till then, Nifty (in dollar terms) was underperforming MSCI World Index by over 13 percent YTD (almost fully contributed by rupee depreciation of 15 percent).
Since then, Nifty has outperformed the MSCI World Index by nearly 10 percent (mainly contributed by Rupee appreciation of 5 percent).
Rupee appreciation in the last six weeks can be attributed to a fall in crude prices. Since October 11, Brent Crude (in dollar terms) has fallen over 26 percent.
Crude forms nearly 25-30 percent of our total import bill. In the quarter ended June, overall Balance of Payments (BoP) deficit (highest since Dec’17) was ~40 percent of crude imported during the quarter.
India is one of the key beneficiaries of fall in crude prices. Hence, the relative rally can continue as long as crude is weak.
Q. What are your views on the recently concluded earnings season?
A. September quarter results season has just finished. We had a decent quarter. The Nifty revenue growth was 22 percent YoY, best since 2012.
Ex-oil companies, it was 14 percent YoY and EBITDA margin (ex-Fin and oil) shrank by 40 bps YoY and 30 bps QoQ to 20.7 percent showing cost pressures.
The free float Nifty net income was up ~10 percent YoY which is in line with estimates. This was the 5th straight quarter when Nifty EPS ex-corporate banks grew over 13 percent, something not seen in the last five years. This gives comfort that earnings trajectory is improving.
The next two quarters of the financial year are also expected to be on similar lines. For FY19, consensus estimates were high to start with. They have come down now to ~18 percent from ~22 percent at the beginning of the financial year.
Even if we get a number of ~15 percent+, that would be a good number to enter FY20. In that case, FY20 would hold promise to deliver 15-20 percent earnings growth as well.
Q. Do you think that foreign investors are back on D-Street or is it just a small bounce ahead of new year holidays?
A. FIIs have been net sellers to the tune of ~$13.3 billion so far in 2018. This is the highest ever net sell figure by them in India in any calendar year as the previous high being $11.8 billion in 2008.
Out of this $13.3 billion, net sell in equity was $5.7 billion (highest net sell since 2008) and net sell in Debt was $7.6 billion (highest net sell since 2013).
Globally, we were witnessing quantitative easing cycle since late 2008. However, now the quantitative tightening has begun.
The US has been hiking rates and also selling bonds. Eurozone has stated that they would stop buying bonds after Dec’18. Under quantitative tightening, withdrawal of money from emerging markets has been observed.
However, India has a strong position vis-à-vis other emerging markets (both in terms of growth and external debt), and the fall in crude only strengthens our macro picture. In such a scenario, India would be viewed positively on relative terms as far as fund flows are concerned.
Q. What are your expectations from the upcoming RBI policy meet in December?
A. The Reserve Bank of India (RBI) has stated that it will anchor its policy decisions on headline inflation numbers and not on core inflation numbers.
The headline inflation number has been at 13-month low of 3.3 percent versus core inflation of 6.2 percent (close to 4-year highs). In such a scenario, we expect a status-quo by the RBI in the December meeting.
Q. Given sudden appreciation in rupee, do you think it is time to re-look at IT and pharma?
A. IT and Pharma benefit from rupee depreciation. The recent appreciation of rupee may prompt analysts to revise their estimates. However, it may be noted that a 4 percent appreciation in rupee impacts earnings of these companies by 3-6 percent in a full year.
Hence, adjustment to such an extent is fine. An overweight stance to the extent of INR hedge could get reduced, but there is value in both the sectors.
The Nifty IT index trades at 9 percent discount to Nifty Index compared to the 10-year average of 9 percent premium that offers a decent margin of safety.
Similarly, Nifty Pharma index trades at 31 percent premium to Nifty Index compared to the 10-year average of 39 percent premium and a 4-year high of 98 percent premium – and all this on relatively depressed earnings estimates for the sector.
Q. What are the sectors according to you are recommending to your clients and why?
A. We are Overweight on banks (preference is for private sector banks), select consumption, industrials and pharma. We are underweight on NBFCs, utilities, energy and metals. Not to forget, private corporate lenders and industrials hold a lot of promise going into 2019.
Q. What is your view on global markets? Are the new emerging sectors growing in the other parts of the world?
A. Globally, stocks have been volatile in recent times on growth concerns and fears of the US Fed raising rates. The volatility may continue but the stocks remain underpinned by solid earnings outlook and improved valuations.
The US earnings outlook remains strong with Q3 earnings surprising on the upside (+28 percent) and Q4 earnings are expected to remain solid (+20 percent).
The US Fed has softened its tone and is unlikely to raise rates aggressively with benign inflation and moderating growth. Emerging Market (EM) central banks have paused rate hikes as the plunge in oil prices reduces inflation risks.
The October sell-off and weakness in November continues to improve valuations with P/E multiples below the long-term average in all markets.
Further, the possibility of a US-China trade agreement at the G-20 Summit and a potential Brexit agreement could help stocks recover.
Potential risks include over tightening by the US Fed, the tussle between Italy and EU over Italy's budget proposal and Brexit uncertainty over the tentative agreement with the EU.
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