Government policy, decision taken ability, measures and spending can get delayed impacting the earnings growth expectation of the market, if there is a fragile hung parliament.
Market is hoping for continuity in reforms and measures implemented. A fragile hung Parliament will be a big risk for the domestic market impacting the premium Indian valuations compared to the other emerging markets, Vinod Nair, Head of Research, Geojit Financial Services said in an interview to Moneycontrol's Sunil Shankar Matkar.
Q: Private sector banks have outperformed this year. Do you feel the NPA trouble is finally behind us?
A: NPAs have reduced from 11.5 percent in March 2018 to 10.8 percent in September 2018, and they are expected to decline to 10.3 percent in March 2019. This process is ongoing and will provide a real effect to the humongous size of stuck projects in India, it will help in restarting private spending in the coming years.
However, there can be temporary delay in the resolution process given the recent supreme court order regarding February 12 RBI circular.
Q: What is your reading on the RBI monetary policy and also your outlook on economy now?
A: The outcome has been largely in-line with expectations but with a surprise that the rate cut decision was not under a complete consensus but with a diverged favour ratio of 4:2. We don't expect a cut in the next policy, still we continue to believe that there is scope for a further cut in repo rate from 25 to 50bps in the next 3 to 4 policy meetings, supported by a weaker economy, inflation and reduction in global bond yield.
We expect this weak economy to reverse Q2FY20 onwards. However, one needs to keep a close watch on the upcoming poll results, possibility of fiscal slippages, effect of El Niño, and crude prices.
Q: Can a weak monsoon set the clock back by a few quarters?
A: Agriculture is about 15 percent of the GDP, a weak monsoon impacts more if it is on a consecutive period. Increased percentage of irrigation has reduced the effectiveness of weak monsoon in the economy. But it does impact the sentiment and growth of the rural economy.
And given the higher weightage of primary items in the inflation index, it impacts CPI, interest rate and NPA issue in agriculture credit having a dire effect on the respective segment of the economy.
Q: Do you feel we are still in a bull run. If yes, why?
A: We are in long-term bull market which is under consolidation due to slowdown in economy, liquidity and political constrain in the global & domestic market. This issue is being addressed by respective central banks, institutions or governments which is likely to be corrected in the coming future. This is expected to be supported by earnings growth or else this consolidation can continue due to premium valuation.
Q: Auto was the underperformer in last one year. Will you wait for better levels before investing in auto or is it a good time to buy?
A: In last 2 quarters, auto sector witnessed sluggish demand and we expect this trend to continue till first half of FY20. Post which we expect pre-buying before shifting from BS-IV to BS-VI in FY21.
During FY19, Indian OEMs registered a growth of 10 percent led by 5 percent in passenger vehicles, 11 percent in 2/3-wheelers and 15 percent in commercial vehicles, which was below our expectation. This has led to production cut by major OEMs due to higher inventory and lower liquidity.
This muted trend can continue in the short term, however, we remain positive over the long term owing to lower valuation, increase in the rural income and higher infra spending. Currently, the Nifty Auto Index is trading at 16.5x on a 1-year forward basis which is reasonable compared to its 3-year historical average at 16x.
Q: RBI lowered its growth forecast for Q4FY19 and 1HFY20. Is it a big risk?
A: This downward revision in forecast is a proactive decision by RBI which was not completely expected by the market. But it was factored in the background given the latest domestic and global data, hence it is not a complete setback.
This cut in forecast was supported by reduction in inflation forecast and interest rate with enough room for more cuts in the future, hence we do not expect this to further impact the market unless there are additional weak data.
Q: Do you feel fractured mandate in general elections is the biggest risk in 2019-20?
A: It will be, given the fact that market is hoping for the continuity in reforms and measures implemented in the last forum. A fragile hung Parliament will be a big risk for the domestic market impacting the premium valuations of India compared to the other emerging markets.Government policy, decision taking ability, measures and spending can get delayed impacting the earnings growth expectation of the market.
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