Market looks good from 3-5 year perspective: IIFL

Going ahead, Jain expects the Reserve Bank of India to cut rates. Not much should be made out of the central bank’s shift of policy stance from accommodative to neutral, he said.

Below is the transcript of Nirmal Jain and R Venkatraman’s interview to CNBC-TV18’s Nimesh Shah.Q: We have seen a bit of a pullback rally, good 10 percent from the recent lows. From here on given that Q3 is now behind us, given the RBI policy is behind us, what is the general sense as far as the markets are concerned?Jain: As of now markets are looking very good. For the first time in the history of stock markets since reforms we are seeing that domestic inflows - mutual fund and insurance companies are decisively more than FIIs and they have become sort of decisive factor in the market and they are consistent flow of money.Along with that, we are also seeing that FIIs that were sellers, most demonetisation have again become buyers. So, we are seeing the liquidity flow in the market is very strong. So, India is poised to grow at 7.5 percent even at conservative or consensus estimate which again is the best in the world. So, macro factors are very positive, Budget has been good at least from fiscal prudence point of view which is more important for a large investors.Also people are now looking forward to maybe this year we will end Nifty with 8 percent growth in earnings which is not such a strong growth after 4 years of lacklustre performance. However two things are happening, one is that people will get used to growth at a new normal which maybe lower. 5 years ago typically you would look for 25-30 percent growth stocks, I think in a year or two you will be happy with or satisfied with 15-20 percent or maybe 12-15 percent growth stocks as well.Also interest rate is coming down. If the fixed income instruments can’t give you good returns then the greater allocation will go to equity assets. For typical investor, he doesn’t have a choice. I am not going to put my money in bank deposit at 6-7 percent, post tax it will be less than 5 percent. So, it is better for me to take risk of equity.So, equities are seeing very strong inflow of money on one hand and on the other hand macro fundamentals are improving for sure. So, the underlying tone is bullish. I can’t really comment on the day to day variations from the bottom to top but if you ask me for 3-5 years perspective, I think markets are looking very good.Q: The recent policy from RBI was slightly hawkish, the tone was they have changed the stance from being accommodative to neutral. What have you read of that policy and broadly what is the sense in terms of financials, in terms of banks, how they are going to perform for the rest of the year?Jain: RBI governor has been conservative but at the end of the day, what inflation is and what inflation looks like will decide interest rates. Given that system is kind of awash with liquidity and we are seeing that regardless of RBI rates the actual rate they are coming down. So, banks are lending, their MCLR has come down and also the effective rate for the borrowers has come down significantly.Q: Do you expect rate cuts by the end of the year?Jain: Rate cuts should happen. If you look at the consumer inflation, it has been very low. Wholesale prices on lower base are slightly higher but inflation as of now is looking like it will remain under control. So, it is just a matter of time. I won’t read too much into change of stance from accommodative to neutral. Regardless of who the RBI governor is all of us know that monetary policy is driven by inflation and inflationary expectations. We can say that inflation is coming down, not only in India but globally. India is now quite linked to the global economy. So, whether it happens now or later, rate cut will happen. However more than rate cut effective interest rate is going down.Q: Q3 has been slightly better than what street was expecting, broadly what have you made of the earnings and what sort of body language you expect from the corporates at your conference?Venkatraman: We are having our conference next week and we have over 600 fund managers across the globe both domestic and overseas. We also have more than 100 corporates plus specialist speakers.As you pointed out demonetisation in the first week of November had an impact. If we had met in the Diwali of 2016, this Diwali was good compared to the previous Diwali. Since you cover corporates, you would have seen mood was quite upbeat and I would say all of them are feeling confident on the back of a recovery which was imminent because we had just come off a easy liquidity situation plus on the back of a good monsoon.So, I would say that the effects of demonetisation are done and dusted. I think people have accepted and moved on with life. I would say life is coming to normal much faster than what people expected. So, mood is quite sanguine. People are optimistic about India because of I would say liquidity situation because money is available in the system. When I say money, I think rates are coming down not only for the corporates but also for the end users. We are seeing demand coming back.So, I would say the mood at this moment in time is I would say cautiously optimistic. Only one point of concern if I can say is relating to private sector capex. Broadly speaking corporates are operating at 70-75 percent utilisation. So, at this point in time nobody is thumping the table and saying that we will invest heavily in capacity creation but aside of that I think people are cautiously optimistic. Q: I know your conference is more famous for some of the largest FII investors participating, some of the marquee names come with large teams and they meet a lot of corporates over the three day conference at your end. Generally what is the sense that you get from the larger FII community because as you rightly pointed out they are slightly turning to be positive and buying to Indian markets but you have not seen big thumbs up buying coming in from the larger FIIs. Is there still a worry in terms of valuations for India?Jain: No, I think FIIs have been long term buyers and policy environment also has been favourable. They look at values and the valuations might have run up so they might not come, your thumbs up or in a big bang manner at this point in time, but they are coming. If you look at our conference then out of 600 investors, 500 are local fund managers, 100 would be coming from all over the world. Some of them are very large fund managers, they can move big money when they are convinced and they are looking for ideas, they are looking for good quality paper to come to the market by way of IPOs, by way of disinvestment.In our conference other than fund managers and corporates as you know that we have very high quality special speakers and we have Jim Walker and he is going to talk about world war III. Subbarao is over there, we also have a global expert on official intelligence that how that is going to disrupt and the companies and the business and what kind of sectors can get impacted and more importantly how soon that can happen. Many times this digital technology, the way they can happen much sooner than you imagine and sometimes they may not happen as soon as you expect. So, I think everybody is keen to and we have quite a few other speakers from varied field.However, I was just coming back to Jim Walker, he is talking about World War III which is a very liberal off beat theme but his point of view is that globally if you look at US and many other economies, then inequality of income and wealth has become to a level that the masses are willing to vote for an extreme view like Trump we saw in the US, a similar kind of thing can be repeated in France and many other countries. If that happens then the world politically and economically will change significantly than what we are seeing. So, there will be an interesting debate to look for and I think as I said we already have in fact number of meeting requests have already crossed 6000 so it is going to be a one of the largest conferences and has got very good response till now.If I may just add a line, FIIs are very, whether they bring in a lot of money at one go or a period of time but I can’t imagine an FII In the world that is not interested in India. So, they are very hot on India.Q: From a global point of view, what to your mind would be the key risk for emerging markets for India and for the global trade as well because a lot of concerns are being raised about trade wars, currency wars, is that going to be a big challenge for emerging markets like India?Jain: There are so many variables and so many imponderables that you can always look at the risk from different perspective. Personally, if you ask me, as an individual I am really not worried about these things too much because relatively speaking, India is fairly safe and immune. At the end of the day, there is an equilibrium in the world and even if people might have an extreme view but when they look at practically trying to execute this, they come back to the normal view.So, I do not think anything radical is going to happen which should change our fortunes. So, as far as our economy does well, our people are working hard, government policies are on the right track, we should not worry too much about global policies. There will be jitters which are event based, but they get over very soon.Q: India has always been known as a stock picker's market, bottom-up stock specific moves has been the strategy for most of the investors. Two sectors which probably has been top of mind, one is IT on the back of the TCS buyback and expectation from Infosys as well. What is your broad view on the IT sector stocks at the current valuations and the second of course being pharmaceuticals because that is something which has seen a bit of a downward journey in the last few months and probably for a year now. What is your view on these two sectors?Venkatraman: I think it is good that you pointed out because two sectors which always typically were the favourite of foreign investors and actually we saw huge amount of wealth creation in these sectors in the last 10-15 years, be it the likes of Sun Pharmaceutical or TCS, Infosys, those stories are well discounted and become a part of investor's portfolio as well as folklore. Now, these two sectors are facing headwinds at this moment and that is more to do with regulatory concerns in pharmaceuticals because every day you get one US FDA.Q: But good time to buy these stocks now?Venkatraman: I would say that the worst is behind them and if you are looking at a pure valuation perspective, IT offers value and pharmaceuticals also offers value. You saw what happened and it is not proper for me to talk about individual stocks, but one good news in Cadila yesterday and we saw a massive price reaction happening. So, investors would be advised to buy good names in this sector because clearly the worst is priced already.Q: The other big chunk where there is lot of institutional money is the banking space, the Banking, Financial services and Insurance (BFSI) and the banking space. A lot of talks about consolidation in the banking space. I believe your India strategy for 2017 was slightly underweight on financials. Given the scenario which is playing out, what is your sense on the financials? Should one look to buy private banks or NBFCs?Jain: If you look at private banks and NBFCs, they are doing well and they are gaining market share because public sector banks are not able to raise capital, they are not able to grow their balance sheet and they are all saddled with NPAs. Unfortunately, for the last few years, we have been waiting but there is no concrete plan for revival of PSU still and we are looking forward to something by central bank and central government together. However, for the time being, NBFCs and private sector banks look good.There is one phenomena that is happening because when you look at bank credit growth, that is not telling you the entire story. There is a huge disintermediation happening. So, the credit offtake may be around 13 percent but the bank credit growth may be in single digits. So, many large corporates, large NBFCs they are able to raise money directly from the market by bond issuances which is a good trend. So, all put together I would say that private sector banks and NBFCs are still looking good.