Enough reasons to be positive about 2016; like NBFCs: HSBC

Latha: What is the sense you are getting? Are we heading into a year where we will see gains for the Nifty? 2015, from a Nifty point of view, has been quite a disappointment.

A: I think 2015 was a disappointment largely, dealt with the fact that we had very weak macro. We had earnings which had to be readjusted downward in successive quarters. We did not see the reform situation carry out its own situation as what was expected. So, there were a lot of delays in terms of what was expected and what was delivered. So, as a result of all of that, and of course, the uncertainty in the external markets lead to a very soft 2015, but I do not think that there is any reason to now, write-off 2016 altogether because of what has happened in 2015.

I think what it has done is that it has made a base, it has bottomed out, most of the situations that we were worried about have actually been playing out, whether it is in the external situation or on the domestic front. We are seeing most of the banks now ascertain the extent of their asset book quality so on and so forth. So, there is enough reason to be optimistic about what the next year is going to bring us.

Sonia: I was going through your report and you do spot a couple of opportunities in specific sectors and one of your sectors that you are bullish on is non-banking finance company (NBFC), but we have seen some really good performers this year from the likes of Bajaj Finance, etc. Where do you see more value in 2016, in the NBFC space?

A: There is enough value across the space in NBFCs, simply for the fact that you have to look at the situation where the banks are. They have focused on the large loans. They have pretty significant provisioning requirements and the availability of capital for them to grow their book, if demand comes back next year, is fairly limited in that sense.

The NBFCs have actually put themselves into a very nice position, bringing market share. They are looking at niche areas. They are not a bank which provides everything for everybody. They are not in the deposits gathering situations at all. They do not really compete really there, except of course for the overall cost of funds, but there are pretty interesting areas in that space which I think going forward, while valuations of course in certain areas are not really that attractive but the fundamental domestic growth that we expect that 2016 will be start of, these companies are very fairly positioned to take advantage of that._PAGEBREAK_

Sonia: The other space that you are bullish on is the auto space, commercial as well as passenger vehicles, but this year, there has been a big dichotomy. On one hand, Maruti Suzuki has gained 30 percent, and on the other hand, Tata Motors has lost 30 percent this year. So, it has been a confusing picture. How do you approach 2016 in this sector?

A: I think there is a slight difference between what is the listed alternative available for us in the market as well as what is happening on the ground. Some of them are not listed as well. So, the whole idea is to give a sense of what sector was going well, regardless of the listed opportunities.

However, two or three things are working in the favour of this sector. One is that the Seventh Pay Commission has increased urban incomes to a very significant degree and as we all know, once the central government actually does the change then it follows through in the state government and the public sector unit and so on and so forth. So, we see urban consumption really start to pick up. If at the same time and we have already seen a pretty significant drop in interest rates and if that gets transmitted into real purchasing power for consumer discretionary items such as cars for example, we are going to see a very natural bump in terms of demand there and that really is the point I was making in the report.

Now, in terms of the dichotomy you talked about, obviously there are stock specific issues especially when it comes to Tata Motors that the softness at the beginning of the year in terms of global demand for luxury goods was something which was an overhang for the stock and the very difficult environment locally also was something which was dampening the sentiment. But, going forward from a commercial vehicle (CV) cycle perspective, from a revival of sorts in terms of numbers that we have seen in the last few quarters or even luxury goods sold in China, is a reason to believe that this sector overall is estimated to do pretty well for this year.

Latha: Will this also be yet again a midcap year, 2016 or will the big boys come out and perform?

A: That is an interesting question. This is something which I have actually been toying with for a little while because if you look at the classic ways that the economy turns and then how the stock market revive, it usually is led by the largecaps and the midcaps really come in the second phase because once the overall economy starts to do well then the midcaps really start to benefit from the overall spend in the economy. But, this year, it has not really been classic in that way, that we see the midcaps having done even before the economy has actually bottomed out. So, it is a little bit of a change from the norm.

However, going forward there is a reason and a case to be made for largecaps simply for the fact that since April of this year, the foreign institutional investors (FII) have more or less remained out of the picture, they have consistently taking money off the table, emerging markets have not been really very hot and as a result, India flows also follow those. But, I believe that when fresh looks are taken at asset allocation globally, we should look at a situation where India clearly looks to be in a better position across most emerging markets and I am very hopeful that allocations, I am not talking about India specific, but at least from an emerging markets perspective, there might be reason to be expecting flows to come in to India from global investors and typically, these investors prefer largecaps. And over this period of time, the underperformance in largecaps will also be mean reverting to a certain extent.

I would think that there enough to say that largecaps can bounce back. But having said that, again I will just remind you of the fact that once the economy starts to pick up, the midcaps also perform. So, there is something for everybody there in the next couple of years, I would say.

Latha: So, 9,000, 30,000?

A: Very difficult to predict because if it does hit it one day then the prediction is correct, but the next day, something else happens.

Latha: No, what are the general gains for the year? Do you think they give you a 15-20 percent return – the big boys?

A: I think the only problem, to make a very simplistic view of where the markets will go by the end of the year is the fact that the valuations today reflect some sort of expensiveness, not because they are euphoric, because the under-delivery in the earnings has caused the price-earnings ratio (P/E) to become a little expensive. But that is a little bit of a red herring, because, if you see that earnings start to pick up, then we are quite almost on the average that we have seen for the last 15 years on a one year forward basis.

So, in terms of the returns from here, they just kind of tempered by the fact that if the market starts to build in those kind of returns, then the market will become even more expensive on a P/E basis, which I think is unlikely right now because there is no euphoria. So, I would think that the market return will be a little back-ended and towards the end of the year. So, that really means that maybe the upside is captured before December next year or it might spill into 2017. So, that is why I am a little hesitant in saying what the return is for next year.