Earnings multiples indicate room for market fall, financials not at systematic risk: Sanjay Mookim

Mumbai: Investers reacts while watching the stock prices at a screen on the facade of the Bombay Stock Exchange in Mumbai on Monday. The sensex soared on Monday follwing the BJP's victory in the Gujarat and HP Assembly polls. PTI Photo by Shashank Parade (PTI12_18_2017_000140B)

On Tuesday, the market saw selling in early trade but recovered later. Indices are seeing volatility ahead of expiry of September derivative contracts.

Merrill Lynch has been highlighting the concerns around external environment (falling rupee, rising crude oil prices and trade tensions) and deteriorating internals ahead of general elections, which both things are not going to turn favourable soon, Sanjay Mookim, Director, India Equity Strategy, Bank of America Merrill Lynch told CNBC-TV18.

"So I expect the market to go down further."

10 Nifty stocks — Yes Bank, Indiabulls Housing Finance, Bajaj Finance, Maruti, SBI, IndusInd Bank, Bajaj Finserv, Zee Entertainment, HDFC and Titan Company — have corrected 11-40 percent since August 28.

Mookim said he would better look at where the fair value is instead of looking at price action. Though he said that earnings multiples indicate that there is some more room for market fall.

Related stories

Sanjay Mookim

Indian Equity Strategist|BofA Merrill Lynch Global Research

• 
  BofaML's Mookim is not comfortable with market's valuations yet; likes housing space
• 
  Market cheers Gujarat exit poll outcome, but why is BofAML's Sanjay Mookim cautious?
• 
  Expect earnings to pick up in Dec; globally Indian market may underperform: Experts

"Aggregate multiples are much higher (in India) as compared to emerging markets (EMs) on long-term average basis. If this is a correction, then there is significant room to normalise price-to-earnings (PE)."

The macro risks have started showing now and FIIs may re-look at their India position, he said.

Talking about rupee depreciation, Mookim said: "Weaker rupee will have positive earnings impact as well as earnings risk in terms of margin pressure or topline concerns."

Domestic companies are expected to see earnings downgrade as expensive multiples are not a good sign, according to him.

Financials

Financials space has been butchered badly on liquidity crunch fears and also profit booking. DHFL fell 60 percent intraday on last Friday.

Mookim said financials are not at systematic risk right now as there has not been any contagion or solvency problem but yes there would be margin impact on wholesale funded lenders. "I would stick my neck out and say people who had overbought position started selling it now. It shows excess valuations correcting and fewer buyers right now rather than systematic risk."

If I focus on multiples, then there are relative trades, he said. "Rural focussed stocks will do well and rural income is likely to surprise positively.

Market looks weak but he sees relative trades in retail, select banking and rural focussed stocks.

Rather than looking at price action, he would prefer to see price to book value or price to earnings multiple which indicated that there is still some more downside in the market.

Federal Reserve

Two more Federal Reserve interest rate hike already pencilled in by December as there is reduction in balance sheet of central bank, he said.

So dollar interest cost is likely to increase and this trend is likely to continue for next few months. Hence, I expect emerging markets pressure to continue for next few months unless some data points go bad in the US, he added.