We run the risk of passive money going out, if markets rally further in the very near future. However, we can expect local and long-only money entering markets in any sharp correction.
Government action in the first 100 days and the Budget could keep the market at elevated levels. On the other hand, any negative news flow could lead to a minor single digit correction in Nifty to either 11,500-11,200 levels, Rusmik Oza – Head of Research, Kotak Securities, said in an interview with Moneycontrol’s Kshitij Anand.
Q: MPC slashed rates by 25 bps earlier in June, which was expected. Do you think RBI could do more to lift growth in Asia’s third-largest economy?
A: The Reserve Bank of India (RBI) will meet again in August when we expect another 25 bps rate cut. As the next meeting is in less than two months, it was wise on RBI's part to go slow on the rate cut. In August, the RBI will have a fair assessment of rainfall and will be in a better position to judge the impact of the Budget and fiscal deficit situation.
Besides rate cuts, the RBI is likely to ensure smoother monetary transmission to revive growth.
Q: When we hit a record high of over 40,000 on the Sensex and over 12100 on the Nifty50 – valuations were a concern. Do you think investors have got the reason - deteriorating macro and NBFC crisis to sell into this market? What is the bottom you are seeing for this market?
A: Valuation remains a cause for concern and we could see profit booking above 12,000 Nifty levels. Overall, macros are weak and most indicators still suggest a slowdown. We should wait for more clarity on steps likely to be taken by the RBI to ease the liquidity situation and resolve the NBFC crisis.
The large-caps and Nifty are trading at rich valuations and hence the scope of re-rating is very less. On the other hand, government action in the first 100 days and the Budget could keep market at elevated levels.
Against this background, any negative news flows could lead to a minor single digit correction in Nifty to either 11,500-11,200 levels.
Q: With Modi 2.0 the voice of mid-cap and small-caps outperforming large-caps. Do you still feel that the broader market could outperform and if yes then why?
A: Valuations of large-caps are rich as Nifty is trading at a Forward PE of ~18.5x. In contrast, the midcap Forward PE is cheaper at ~15.5x. Time wise as well mid and small-caps have been correcting and underperforming the Nifty for last 18 months.
Due to elevated Nifty levels, investors are reluctant to invest in the broader market as any correction could lead to sharper fall. We can expect the broader market to start outperforming the Nifty gradually as macro indicators start showing signs of improvement.
Q: If somebody constructed a portfolio today, what would be your advise? Are there any sectors which are at risk amid global or domestic factors and investors should limit their exposure?
A: Investors with higher risk appetite can make a higher allocation to mid and small-caps at this juncture. In case of large caps, spread out the investment over a few months to reduce the cost of investment.
There are a few sectors, such as auto, auto ancillaries and NBFCs, which going through a serious slowdown and are worth avoiding until there is more clarity on them. There are also a few sectors where valuations are rich and demand has moderated. Here we would avoid consumer durables and consumer staple companies.
Q: The Auto sector has been on the sell list of both MFs and FIIs – do you think this sector could emerge as a dark horse in the next 12-24 months? What were the factors which contributed to the underperformance?
A: There is a serious slowdown in automobile demand across all categories. Few factors that contributed to this slowdown were the uncertainty of election outcome; sharp rise in insurance cost; liquidity squeeze of NBFCs and, a general slowdown in demand from rural areas due to of farm distress.
For the short to medium term, the sector will continue to underperform as the base numbers of 1HFY19 are high and to that extent numbers in 1HFY20 will disappoint.
However, the long term story of rising income levels and higher per capita GDP still holds true. Hence, if someone has a 12-24 months’ time horizon then one can do a SIP in the sector for the next six months (so as to average out the cost of investment).
Q: What is your take on the March quarter results? Is growth visible? Which stocks according to you surprised and disappointed the markets?
A: March quarter results were disappointing. Excluding banking, the net profit of our institutional coverage universe has increased by just 6 percent year-on-year. Net profit of many sectors such as automobiles and auto-ancillary companies, metals and mining, pharmaceuticals and telecom reported a decline in the March quarter.
Overall Ebitda margin of our institutional coverage universe has remained flat on a YoY basis. Companies which surprised positively were Mahindra & Mahindra, Ultratech Cement, Power Grid, Cipla and Bajaj Finance. Companies that disappointed were IndusInd Bank, Yes Bank, Asian Paints, Sun Pharma and Maruti Suzuki.
Q: Indian market is up 10 percent in 2019 – do you think this momentum will continue amid rising concerns around NBFCs, and global factors such as trade wars and shrinking liquidity?
A: Indian markets could remain range bound for some time due to expected government policies and monetary accommodation by the RBI. The upside seems capped but at the same time, the fall may not be severe.
The trade war could lead the potential rate cut by the US Fed, which in turn could be positive for flows in the emerging market. But, serious devaluation of the Yuan could lead to a sharp depreciation of emerging market currencies against the Dollar.
Q: How are we placed among emerging market peers? The rupee is stable, but recently FIIs have started to take money off the table. What position does India have among the portfolio of FIIs investors?
A: India is better placed in the emerging market pack due to stable government formation and expected policies. Pre-election foreign flows were also very strong.
To that extent, we run the risk of passive money going out, if markets rally further in the very near future. However, we can expect local and long-only money entering markets in any sharp correction.
The fall in crude prices is helping rupee to remain stable against the Dollar. Expect the rupee to remain stable unless the Yuan sees any major weakness. India still remains overweight in the FPI allocation.
In future as and when ‘China-A’ shares are added in the MSCI Emerging Market Index we could see some outflows from India.
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