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Last Updated : Feb 04, 2017 12:45 PM IST | Source: CNBC-TV18

Good time to buy stocks; don't step back: Macquarie

Speaking to CNBC-TV18, Sandeep Bhatia, Head of Equity at Macquarie Securities Group, said the market would present several opportunities this year.

Sandeep Bhatia, Head of Equity at Macquarie Securities Group, said on Friday that 2017 could well be a headline year for flows into mutual funds.

Speaking to CNBC-TV18, Bhatia said that flows would be positive, especially in the near-term, and would hold the markets up.

He said mutual funds industry, which had shown resolve even when the chips were down, had also been given impetus by the government’s decision in November last year to devalue high-value bank notes.

“Right now is a good time to buy; don’t step back,’’ he said. ‘’Markets will present opportunities this year.

He said that while the note ban had affected earnings, he expected growth to return from June onwards.

On the Nifty, he said banks will be the leaders in the near-term and public sector banks would make a comeback as he expects the Reserve Bank of India to announce a rate cut next week.

“I expect a cut of 25 basis points,’ said Bhatia. “We are in a position where rates can be cut substantially, by around 50-75 basis points by the end of the year."

He said the prospect of a rate cut should be buoyed by the fact that the rupee had been faring better than other currencies in Asia.

Below is the verbatim transcript of Sandeep Bhatia’s interview to Latha Venkatesh & Anuj Singhal on CNBC-TV18.

Anuj: Big comeback for Indian market truth be told in line with what emerging markets have done over the last couple of months, but is the risk reward still favourable?

A: Well, I think earnings are still to come, we all know that so I think the risk reward is on balance. I think right now the flows will predominate. We could see 2017 as headline year in terms of flows into domestic mutual funds. We could see upwards of USD 20 billion for the year. So, this is clearly something which is a very positive development, partly spurt by all the long-term work that the mutual fund industry did for so long. When the chips were down they continued doing the right thing and of course demonetisation has added some positive impetus to the inflows.

Also the foreign outflows that we have seen have started slowing down and we could see neutral to a slightly positive numbers for the year for foreign inflows, so I think flows would be very positive especially in a near term which is holding the markets up. The real challenge will be how and where and what is extent of earning growth. I think earning growth should come back from June onwards. The sectors which currently are doing well will of course see faster earnings growth. But the broader economy and the CAPEX will also probably come through by the end of this year. So, this is going to be good year 2017.

Latha: What kind of stocks would you bet on? Let us first take the Index itself, are we going to see more on the metals would you change your strategy come to may be public sector banks what would be your leaders in the Nifty first?

A: I think banks will be the leaders in the near term probably, high quality banks and private sector banks. But, if the economic growth comes by the end of this year even the public sector banks would come back. I would expect at least a 25 basis point cut in rates on February 8th. I think we deserve more, but maybe we take it gradually. But clearly, we are in a position where rates can be cut substantially, maybe 50-75 basis points in the year. We have to wait and see how the Reserve Bank of India (RBI) sees the Budget, but I think it should broadly be very positive assessment and credible numbers coming through.

Also we have to remember that the commodity picture while looking very good right now may not remain so for the rest of the year. Clearly, that depends on how China growth comes through. We also have recently cut our numbers for oil forecast, so Brent forecast we have cut for the current years by USD 4 to USD 56 and USD 12 for 2018 calendar to USD 57 which is very much near the spot. I think if oil remains under control it is further positive news for India.

Anuj: The story of the last two days also has been the comeback of IT and pharma – one or two days is may be bit too early to call it a bit of a reversal but what is your call is the risk reward now in favour of taking contra longs in IT and pharma?

A: It depends on the US dollar trajectory partly at least I would say. I think there is going to be a near term pressure on IT continue until the immigration and the work visa policies of the Trump administration have been spelt out. So, to that extent there would be near-term pressure so I would not be going long right now but probably after March-April would be a better time once there is policy clarity. I don’t expect the worst case scenario to come through in fact if you look at the commentary coming out of the US from our research it essentially says that could be a credible plan for cutting spending which would be tabled by this admiration. Congressional Budget Office would then be looking at lower structural fiscal deficit in the US than what they are modelling over the next ten year period.

So, this kind of a credible plan if that comes through from the Trump administration it would actually mean a stronger dollar. There is very strong co relation between US dollar strength and the structural deficit in the US economy. So, if we see a change in the path of fiscal deficits in the US, a stronger dollar would be positive for the export sector for India. So, to that extent that would be a positive for both the pharma and the IT sector, but I would wait for policy clarity specially for work visas in the near term.

Latha: You started by saying that later in the year you would even turn positive on PSU banks if growth picks up, but it is a non-bank space that is extremely interesting. Do you like the MFI space, do you like the news of the brewing merger and within the NBFC, the other the non-MFI NBFCs as well the big Bajaj Finance’s?

A: Yes, I think all the NBFCs are slated to do better primarily on two things one rates will be going down as I highlighted in the first bit. Also, I think underlying loan growth will be strong. I wouldn’t want to comment on any impending mergers because we will wait for the outcomes eventually whether they happen or not. But, the entire financials and the non-banking financials space right now high quality performs. I think if growth comes back by May-June and we will probably know early than that by April we will see NBFCs would be good picks from here onwards and even public sector banks.

Anuj: What about telecom that has made a big comeback it has been the ignored sector for almost a decade now. How have you read into the news of a potential Vodafone and Idea Cellular merger and your call on the sector?

A: I think consolidation is good for every sector. That is something which is clearly playing into numbers for stocks right now. The real challenge I think is to take a call on how the players, the merged entities behave. So, there is a school of argument which says that the merged entities will now behave more rationally. There are large capital employed in the sector and therefore it needs to generate a certain return on capital and pricing is at the worst and at the bottom right now and from here on pricing will definitely improve.

There is also fillip side and a contra argument is that there is still enough competition for pricing to remain low and trend down over longer period of time and margins will come under pressure. We are of the view that near term consolidation is good for stock prices, but once the consolidation is over we will have to wait and see what the strategies are for the top two players and to see where we see a settling down of price competition.

So, in the near term good for stocks, but structurally still not very clear. I would take profits if stock continue to rally from here but, yes there is impetus in the near term because consolidation is something which is very positive for the entire sector.

Latha: I know it is small midcap space in the larger scheme of things but media interests you?

A: Definitely, we like Dish TV, we like Zee Entertainment and the good news on this sector is that actually the impact on advertising has not been as pronounced as some people thought. In fact I would say the entire earnings season at least till now has on the whole positively surprised most markets watchers including us. I would think ad spending would revive. In all my conversations with most FMCG companies the outlook is that consumption is coming back.

Definitely, it was on a very strong play in September-October before demonetisation and even across the board for most consumer companies. By April things will be very much normalising. To that extent advertising spend will also come back and therefore media will remain our favourite and we would remain buyers of these stocks.

Latha: For stocks that you were speaking about public sector, Macquarie hasn’t had a very strong opinion or very positive opinion on public sector banks, so it is good to hear that your mood is changing now. Would you stay with State Bank of India (SBI), Bank of Baroda (BOB) of the world or having looked at the Vijaya Bank numbers you want to even come lower down into the midcap PSU banks?

A: It is too early to go lower down the quality. We have liked private sector banks always we continue to rate them higher than public sector banks. I think the entire rate cycle is probably going to surprise more people than currently anticipated. My own view is that the rate could see a deeper cut especially because the rupee has been stronger than most of its peers in Asia.

If we see a stronger US dollar which is what our US research tell us if we have a consolidating path of the fiscal deficit in the US that is also good news and gives some more room for rupee weakness and rate cuts. If that happens that is broadly good for the entire export sector. Rate cuts would also feed through in the public sector banks and that is probably at the later part of the year. Right now the high quality private sector banks where we would remain.

Anuj: What about metals that is a huge rally which has played out but do you think the cycle is still supportive? We all know how these stocks can surprise on the upside and on downside and do you have any metal names as part of your core holdings?

A: We like Vedanta so that is one stock which is definitely there on our radar. Metal story is actually completely driven in the medium-term by what happens to growth in China. We think growth in China will slow, but will remain still at a very healthy level. To that extent at least for 2017 metal stocks would remain firm. The longer term trajectory of metal prices is honestly difficult to tell, so to that extent that is the one big delta for continuous stock performance. Right now we would continue to focus on the likes of Hindustan Zinc and Vedanta.

Latha: Any other sector in the midcap space that we haven’t spoken about? I primarily wanted to ask you about even consumption FMCG for instances and discretionary?

A: If you see the numbers mostly they have surprised. If you see the outcome also on the excise duty of cigarettes it has been very reasonable. Consumption will continue to recover. It will recover by April to June definitely and advertising will also come back with it. But broad consumption will remain strong. The real challenge I think is valuations and that is the first bit that we try to address saying that valuations and risk reward is in balance right now so the market is definitely not cheap.

I am also cognisant of the fact that flows will be very strong all through this year. So, right now is not a time to step back, you would buy every dip because the market will give you some very sharp opportunities maybe in the first quarter of this year. But if flows continue to remain strong which I do expect than the market can inch up really higher going into the summer. So, that is how I see the market rise now.
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First Published on Feb 3, 2017 09:54 am
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