Till the time the general elections are over, the market will be volatile. Unless we have fractured mandate, it will gradually revert to fundamentals and valuations
With politics taking centre stage ahead of the busy elections calendar, the market’s move in year to come could be divided into two parts—before the elections and after it, says Rusmik Oza, Head of Fundamental Research at Kotak Securities.
“Till the time general elections are over, markets will be very volatile. Second phase could be after elections, where the market could react depending on the election outcome. Unless we don’t have fractured mandate, markets could gradually revert to fundamentals and valuations in the second half of CY19,” he said in an interview with Moneycontrol’s Uttaresh Venkateshwaran.
Q: How would you sum up the market’s performance in 2018 so far? What is your outlook for the year ahead?
A: 2018 has been a disappointing year for the market as broader mid and smallcaps are deep in the red. Till November 30, the BSE Mid Cap index and BSE Small Cap index are down 16 percent and 25 percent, respectively.
The rise in Nifty too has been led by a handful of stocks. Global factors like trade war, US Fed rate increases, swing in crude prices and currency impacted Indian markets. Closer home, the issue of IL&FS led to uncertainty in the market.
The outlook for next year could be broken into two phases. Till the time of general elections, markets will be very volatile.
The second phase could be after elections, where the market could react depending on the election outcome. Unless we don’t have fractured mandate, markets could gradually revert to fundamentals and valuations in the second half of CY19.
Q: Factors such as oil and rupee have been in favour of D-Street recently. Is this rally likely to continue?
A: It is difficult to take a call on crude prices as OPEC is yet to meet. From a CY19 perspective, it seems supply of crude could be higher than demand. To that extent crude should stabilise in some range.
India’s economy can absorb and manage crude between $70-80/bbl. Crude will hurt India only if it sustains above $80/bbl.
Q: One big news to hit the Street this year has been the liquidity crunch in financial space. How should an investor approach the market, especially the financial sector, keeping liquidity in mind?
A: Within the financial space, there could be headwinds for the NBFCs as the cost of borrowing will rise and growth could come down. We like corporate banks within the banking space as earnings will see a sharp uptick in FY20 (due to a steep decline in loan-loss provisions). NPL cycle has peaked and NCLT resolutions are happening.
Out of the first list of 12 NCLT cases (accounting for 25 percent of banking NPAs), we could see a resolution in around seven cases. Valuations of corporate banks on Price/Book Value is very reasonable and there is scope for re-rating in them.
Q: Do you see any major headwinds or tailwinds for the market in the year ahead?
A: Future global headwinds/tailwinds: UK's handling of Brexit, Fed action on rates in CY19, movement in crude and developments in Sino-US trade war.
Future local headwinds/tailwinds could be: Monthly GST collections, government meeting its divestment target and the election outcome.
Q: What is your review on the recently-concluded earnings season? Which ones were the big surprises and disappointments?
A: The recently concluded result season has been better than expected. The Nifty50 earnings grew by 10 percent, 4 percent above our house estimates.
However, underlying trends showed mixed trends with 1) banks seeing further fall in slippages, 2) consumer staples companies showing strong volume growth, and 3) industrial companies seeing robust order inflows. Automobile companies reported weak volumes and results.
Q: What are the sectors investors should keep an eye on in the near term?A: We like the following sectors from a one year view:
- Auto ancillaries: Healthy replacement demand and recovery in volume growth expected in FY20E. Tyre stocks also look appealing.
- Corporate banks: Expect a sharp surge in earnings of corporate banks due to a steep decline in loan-loss provisions. NPL cycle has peaked and NCLT resolutions happening.
- Technology: The real benefit of currency depreciation will reflect in FY20 earnings. Demand across sectors including BFSI is healthy.
- Building materials: Valuations have gone far below 10-year averages. Post steep decline in FY19E, expect earnings to go up by 25-30 percent in FY20E.
Assembly Elections 2018: Read the latest news, views and analysis here