Speaking to CNBC-TV18 Vibhav Kapoor, Director, IL&FS said that liquidity will continue to drive markets. He said domestic factors are positive. "We have had the GST, the Seventh Pay Commission hikes and a good monsoon. Over all it is a good atmosphere for equities."
However, globally, if the US were to go into a recession, then things could become bad. “If the US does well, for some time, this liquidity will stay,” he said.
He said that it is okay to chase stocks and valuations. But if valuations become too high, somewhere down the line, they will go into a correction, he said. But I don’t see it happening, he said. "The US elections are one thing to look out for.”
Regarding the Indian market, he said that things are expensive. One has to look at it relatively. Yields and interest rates are low everywhere, he pointed out. “The point is if interest rates remain low everywhere, valuations go up.”
He believes earnings growth has started in India and it will move the floor of the market. If you have 12-13 percent growth this year, to that extent valuations will become comfortable at higher levels, he said. "The floor will move up."
Overall, so far, Nifty results have shown a 12 percent earnings growth. When the season ends, he expects it will be around 8-10 percent.
He bets on domestic sectors. Pharma and IT are going to underperform, he said. The rupee is not going to depreciate much now, he said.
He is cautious on banks.Below is the verbatim transcript of Vibhav Kapoor’s interview to Latha Venkatesh & Anuj Singhal on CNBC-TV18.Anuj: It has been a remarkable one way rally for the market, global in nature. Do you see this liquidity continue to drive the market back to all time highs?A: Yes, we have had two things. One is the domestic factors, which have been very positive and we have been positive on the market for quite a long time now. So, we have had the goods and services tax (GST), we have had the pay commission and good monsoons all of those factors. That is one part of it.Obviously the other is the global part where it is almost an unprecedented situation in terms of liquidity, low interest rates, negative bond yields and money is looking for a home where even if you can get a five percent return it is great. India definitely obviously qualifies in that situation.But we have also seen that it is all emerging markets (EM) even the US markets, which are at new highs. So, overall it is a very good atmosphere for equities and India stands out in that.Latha: There is no denying that all the central banks, big banks are pumping money now. Bank of England (BoE) yesterday, Bank of Japan (BoJ) earlier in the week and European Central Bank (ECB) was always pumping. We just got a CLSA call stating they are not expecting a rate hike from the Fed this year. But all this is coming in an area, an aura of people downgrading gross domestic product (GDP) growth in all the major economies. Do you think we could continue with the ride or is it just a medium-term threat that one day things will get bad or should we be worrying every day?A: One should worry about it that at some point of time if things do not improve as far as growth is concerned globally then this continuous injection of liquidity could have its own problems. The key there lies in the US because the US economy is the only one, which is still doing relatively well and although it is growing by only one percent, but it is doing much better than the other economies.If the US were to go into recession then things could become bad and the markets will suddenly sit and take notice and say, the whole world has gone into a recession. Therefore liquidity is not going to help. However, if the US continues to do moderately well, for some time this liquidity is going to keep on.Anuj: How do you play this market then? Do you go with the flow in the sense that back the momentum, metals, non-banking financial company (NBFCs), banks or do you take a bit of value call and book profits in some of these stocks, it is a tough call right now?A: Yes, it is and it depends on what type of an investor you are, what type of money you have, what is your particular way of investing, the amount of risk you want to take, it all depends on that.I would say for prudent investors you should always keep in mind the fact that it is okay to chase stocks for some time, chase valuations for some time but ultimately the experience is that if valuations become too high and it becomes too much of a momentum market somewhere down the line something will happen, which will cause it to go in for a very deep correction. I don't see that happening immediately but for example one of the big things to look out for would be the US presidential elections in November which could - if things don't go well - put a brake on the markets and turnaround things. So, it has to be somewhere a median between some sort of momentum buying or investing and some value.Latha: You are okay with the valuations in India at this point in time? You are giving the impression that it is a buying market and the froth will come, it hasn't come yet?A: The froth hasn't come but things are expensive. There is no doubt about it. But again you have to look at it on a relative terms because yields are everywhere so low and interest rates are low. In fact I heard a statement from Warren Buffet some time back saying that if the Fed could guarantee that interest rates will remain at current levels for 10-15 years then the US market could trade at 100 price-to-earnings ratio (P/E). Now that may just be a figurative thing but the point is that if interest rates remain so low everywhere, valuations will go up but as I said earlier that doesn't mean that you just keep on chasing and then suddenly one day you find that everything is gone. So, you have to be prudent also. You have to make sort of a balance between the two.Anuj: But has the floor for this market moved up? We had the Budget day low of 6,800-6,900 but do you think the floor has moved up to 7,500-7,600. In the worst case scenario what is the downside for this market?A: Definitely it has moved up because now earnings growth has started. That is the biggest thing, which will move the floor of the market going up. So, if you have 12-13 percent growth this year and then again 15-18 percent next year. So, to that extent valuations become more comfortable at higher levels. Therefore the floor will move up as the earnings per share (EPS) grows.Latha: Let me speak about specific sectors to you. First of all your optimism was a little bit surprising. You have said now that earnings growth has returned, has it returned? Does Q1 numbers give you that confidence? If you look at the Hindustan Unilever (HULs) and you look at the initial defensive sectors, IT and pharma quite a few disappointments.A: Yes, but if you look overall so far whatever Nifty results have come, there is about 12 percent growth. So, maybe by the time this season ends you will still be at 8-9 percent, which is not too bad given that last three years earnings didn't grow at all. Going forward with good monsoons and GST and the Pay Commission and other things there will be some earnings growth going forward. That is why we are positive on earnings growth.Having said all that and the valuations we discussed if you remember we had been from the beginning saying that maybe that 9,000-9,100 by March 2017 would be an appropriate level for the index if the earnings growth came through. So, when we are talking about expensive valuations we need to keep that into account and if the market starts to reach 9,100 by October or September or somewhere around that then you need to become careful.Latha: Sectors, what impressed you this results season?A: The domestic sectors have generally done well. I am not saying that there has been an outstanding performance obviously but in relation to the last year or two when there was no earnings growth we are seeing some demand growth, some earnings growth.Now, you are talking about IT and pharma not doing well. Pharma we have been bearish for quite some time, having said that the bull market is over. IT is going to underperform because there are too many headwinds globally, in terms of growth, in terms of US what happens in the elections there, Visas and now on top of that lately of the rupee because the way the rupee has broken out or broken down or broken up whatever you may call it -- strengthened -- I think the rupee is not going to depreciate much now for quite some time to come even if it doesn't appreciate much. So, that 3-5 percent advantage, which the IT companies get and are able to maintain their margins is not going to happen. So, IT is not going to do all that well, pharma is not going to do all that well but the domestic sectors are the ones where we are positive.Latha: On the public sector banks, we were just speaking about that trend -- Indian Bank reported marginally lower slippages. Canara Bank did much the same and even Punjab National Bank (PNB) with such a massive pile the point is the delta is pointing lower. Is there anything in that space that beckons your attention?A: I would still wait and prices have run up too fast there.Latha: Point one book to point four book at the most.A: No, that was exactly what I was going to say. I don't think it is point one book and point four book actually because if you take into account all the non-performing asset (NPA), stressed asset and all of that some of them are trading at very high valuations now. They are trading at well over 1-1.5 times value. So, if at all I would look there is in the public sector undertaking (PSU) space would be the very large banks and there is still time to go.
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