He said the current correction will provide a good entry point for quality names that were too expensive until now.
While it is difficult to predict exactly if this is the bottom or there is more to it, what these corrections have done, is to remove a lot of froth in valuation in several companies, Harendra Kumar, Managing Director, Institutional Equities, Elara Capital, told Moneycontrol in an interview.
Q: What is your view on market correction triggered by worries over liquidity crunch in the debt market. Has the market reached a bottom yet?
The situation in debt market is due to specific reasons and as such the rub-off would have been limited to financials and rate sensitives at best. Having said that, elevated valuations were a concern for sometime now.
While it is difficult to predict exactly if this is the bottom or there is more to it, what these corrections have done, is to remove a lot of froth in valuation in several companies.
We believe this will provide a good entry point for quality names that were too expensive until now.
Q: Do you plan to rework your Sensex or Nifty targets given the fresh negative cues?
Back in June last year, we had given a calendar year-end target of 10,900 for Nifty and we do not plan to rework on this at this time as it balances the positives and negatives at play.
If you look at the markets, while the global macro environment continues to remain challenging amidst a) continuing trade war concerns, b) protectionist rhetoric from US (threatening to withdraw from WTO), c) elevated crude prices and d) declining economic growth outlook in Japan, France, Brazil and South Africa, cushion for the markets could come from improving earnings outlook (4.0 percent upgrade in FY20 earnings), and sharply improved GDP (8.2 percent Q1FY19) with robust contributions from agriculture (5.3 percent Q1FY19) and manufacturing (13.5 percent Q1FY19).
Q: Brent crude futures rallied sharply to move close to 4-year highs. Do you think it can inch closer to $90/barrel?
The current elevation in oil prices is a reflection of global concern around budget constraints in OPEC leading to uncertainties in production and impact of sanctions on Iran and its effect on supply.
Internally, we are working with an assumption that crude will not breach $90/barrel level.
We also believe weakness in emerging market currencies, impact of the last rally in oil prices, impact of sanctions on Iran and rising trade uncertainties are all potential risks to oil demand-growth, providing price cushion.
Q: What is your view on the debt crisis in India. Is there a risk the market tightness & risk aversion could continue to spill over into equity market?
The current situation is a result of a unique combination of an unexpected default in short term paper by a key player coming at a time when companies need liquidity for advance tax payments, the result of which has given rise to increase in yield expectations.
As such, we expect the situation to improve a bit over the next month. In terms of spill over into equity markets. Obviously NBFCs will be affected by this, but beyond that, we don't expect further spill over effects. Impact on rate sensitive sectors like auto will be temporary.
Q: What's the call on NBFCs now as stocks are still under pressure?
We believe that NBFCs with more reliance on short term funds will continue to feel the pain – this includes all HFCs, but expect AFCs to be better than HFCs as they have more long-term financing component.
A recent analysis suggest growth and collections for commercial vehicle financers remain healthy which will provide support, in my view.
Q: What would you buy in this market decline and what is your preferred list in terms of sectors and stocks?
We conducted an analysis of key fundamental factors that work during varying market cycles and found that companies that are high quality (high ROCE/ROE), lower on leverage (Median or lower), low beta tend to outperform in times of market correction.
I believe in the current environment investors will be seeking the safety of high quality and high earnings visibility companies and expect quality and growth to continue to outperform.Extending our preference of high quality and growth to sectors, we prefer IT at this point. We have reduced Consumer staples to equal weight in our model portfolio due to elevated valuations. Given continuing business challenges (FDA), our approach to pharma is selective.