Investors should stay defensive as correction looms large: BNP

While the equity investors continue to remain largely bullish, the global bond markets suggest a recession is at hand. Going by earnings report of companies and recent employment and wages data, something seems amiss, says Manishi Raychaudhuri, Asian Regional Equity Strategist, BNP Paribas. The global economy might be somewhere in between and the two markets may have to converge sooner or later, he says. Thus, equity investors need to take up a defensive stance and be a cautious as Raychaudhuri feels a correction is going to hit markets soon.He still feels Sensex will end the calendar year 2016 above 29,000 points and may remain flat till the last leg of 2016 when it may rise another 1,000 points.He sees earnings and economic growth returning soon. Companies catering to rural consumption would be the biggest beneficiaries of this growth. He is positive on private sector banks, cement and the IT sector.Pharma stocks are seeing a bounce back from the lows that the sector faced due to corrections recently. Below is the verbatim transcript of Manishi Raychaudhuri’s interview to Prashant Nair and Ekta Batra on CNBC-TV18. Prashant: Global equities seem to reflect a raging bull market and global bond markets are basically telling us that we have a recession at hand or worse a depression kind of scenario. Which of these two markets are correct, I think it is really the large big question on everyone’s minds, people who have made money, people who have been left out, all have this question. A: You are absolutely right in pointing out that these two different markets are predicting two different scenarios of the world going forward. If one looks at the global growth rates, the kind of numbers that the companies are giving out on a quarter-by-quarter basis, it would seem that the equity market with its super bullish stance cannot possibly be correct. At the same time, if the global bond market, particularly those in Europe and US are predicting a recessionary kind of situation, that also does not seem to be correct going by the most recent data that has come out of the United States in particular if you look at the non-farm payrolls and similar employment and salary’s wages data over past couple of months. So, the truth is possibly somewhere in between and these two markets at some point of time need to converge. Now when that convergence would happen or what would force that convergence to happen is impossible to predict. I don’t think the greatest economic experts can really have a handle on the timing of such a situation. However, one thing is easy to say that investors who are invested in the equity market right now should possibly be slightly defensive, slightly cautious at the present point of time because in the event of a correction it is really the high beta stocks, high beta sectors in markets that would underperform. So, maybe a slightly defensive stance is called for right now. Ekta: Are you sticking by your 29,000 target on the Sensex by end of the year or has there been any changes made on the upside or the downside? A: We have not made any changes because while we did have some earnings estimate downgrade around the beginning of the year in the first quarter, significant part of those downgrades have actually been made up or in other words we have also seen some upgrades even to the consensus earnings estimates over past of couple of months. So, on a net basis, since the EPS estimates have not changed all that much and we are more or less maintaining our valuation outlook, our Sensex target remains 29,000 by the end of calendar 2016. Unfortunately the market is almost there, it is already at about 28,000 which hardly leaves about maybe 3 percent upside for the next three to four months or so. So, that brings me back to that conclusion about Indian market either correcting slightly or staying flat for the time being before the last leg up towards the close of the year. Prashant: When you look at the global trade underlying growth, etc, you find a stark difference between what India is growing at or is projected to grow and what the rest of the world especially the developed world is doing and is expected to grow at. You look at equity markets and there they have respective highs, the S&P or the market here or China not so much, China is been in disfavor for a while so the question is it is essentially macros then, it is not so much about fundamentals of one particular market getting a premium for XYZ, local idiosyncratic factors. Would you agree with that? A: Yes, broadly I would think so. This discrepancy in valuations and discrepancy in growth that you point out, in a sense that reflects in how the markets have behaved. If you look at the Indian markets for example, it has done fairly well this year. It sank to less than 23,000 on the Sensex around February, just before the Budget and it has moved up almost 20-25 percent since then. Of course Asian markets, emerging markets have also moved up, Asia itself is up about 25 percent since January lows but India has clearly outperformed many of its peers this year. I would think that that outperformance essentially reflects the kind of bullishness that investors have on India as a consequence of the reasons that you mentioned that Indian growth is still relatively better, earnings growth is projected to be in double digits while both in the developed markets and in emerging markets it is difficult to find some other markets which has comparable growth and comparable quality of companies.