If earnings growth comes in on expected levels, these stocks could give healthy return in coming months, said Neelkanth Mishra who does not expect much downgrade in banks.
Narendra Modi is set to embark on his second stint as the Prime Minister of India, after BJP-led National Democratic Alliance (NDA) emerged victorious in the 2019 Lok Sabha elections, bagging 353 seats.
The news drove benchmark indices to historic highs, but the market could not sustain those levels due to mixed corporate earnings and slowdown in the economy, something the government has to deal with in the next five years.
Elections do not have a lasting impact on market but earnings are key, Neelkanth Mishra, Managing Director and India Equity Strategist at Credit Suisse said in an interview to CNBC-TV18.
Banks will contribute 60 percent to Nifty50 earnings for FY20 and top eight banks will generate Rs 1 trillion in profit this year, he added.
"Most banks reported an expansion in net interest margin in last two quarters."
According to Mishra, banking stocks could give healthy returns in the coming months if earning growth remains on expected levels.
After the Modi government came in power and the economy slowed down with mixed earnings for the March quarter, expectations increased on RBI front.
The Reserve Bank of India has to find out what is causing liquidity crisis and diagnose that problem correctly as liquidity has been shrinking since September 2018, Mishra said, adding he does not buy the argument that liquidity drained up due to elections 2019.
According to him, the most important factor could be to get the interest rate down in the forthcoming policy meetings, as he feels the real repo rate is at extremely elevated levels and India has abnormally high-term premium.
As interest rates have not fallen as much he had thought two years ago, he expects the interest rate to fall by 2 percent and said that could happen gradually. "Credit spread also can influence and can precipitate multiple issues."
For IT stocks, Misra said when Credit Suisse upgraded sector in 2017, it was cheap, but now some of stocks are expensive on PE basis. "We are marginally overweight on select stocks and fundamentals are deteriorating."
On the earnings front, he said corporate earnings cycle has bottomed out and expects a mid-teens type of earnings growth and particularly banks to be fair in growth.Midcaps, which mostly consist of ill-liquid stocks, are not cheap, although there are gems available, said Mishra.The Great Diwali Discount!
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