Vibhav Kapoor of IL&FS believes the new year 2016 will be dominated by global events and revisiting 2015 lows may be quite possible anytime soon.
Speaking to CNBC-TV18, Kapoor says he doesnt expect any major improvement from the Q3 earnings season that begins next week. He says there hasn't been any major improvement that could reflect in Q3 numbers atleast. However, he believes FY17 earnings are more important for the market.
On sectoral preferences, Kapoor says the IT space may not be able to outperform due to a lot of headwinds. The outperformance in the defensive pharmaceutical space, however, is mostly over now, adds Kapoor.
Below is the verbatim transcript of Vibhav Kapoor’s interview with Latha Venkatesh and Sonia Shenoy.
Latha: It does not seem to have been extremely happy for the markets at least the first effective trading day yesterday. What do you make of the market’s recovery? Is it going to be a very bad blow? The kind of purchasing manager’s indices (PMI) data we got across the globe – China, India, US as well as those Chinese jitters in the stock market?
A: Yesterday was a precursor to what we are going to see for the whole of 2016. I think this is a year which is going to be dominated by global events and global markets and not so much by domestic factors and we have a lot of uncertainty in the global markets; you have the US interest rates. We do not know what trajectory they will take; you have China from where all sorts of data keep on coming and you have the Middle East situation, the geopolitical situation. So, there are a huge amount of uncertainties and these are the things which are going to dominate the markets for 2016.
Sonia: When you say that yesterday was a precursor to this year’s trend, do you get a sense that in the first quartile of the year itself, we could see the market hitting those 2015 lows of 7,540 and maybe even breaching them?
A: It is quite possible. I think the positive side is that you have positive domestic factors. Hopefully, the earnings growth will increase as we go along. But, the valuations are reasonable, they are not all that low and if you keep on seeing uncertainty and things happening in the international markets, you could always see the markets go down further from here. However, I think they are in the process of bottoming out, but this bottoming out could take quite some time and it could be quite violent and quite volatile.
Latha: How are you approaching the earnings season? Will it hold more nasty shocks? Should we see more downgrades or is that at least over?
A: I do not see any major improvement happening in the third quarter. Maybe a little bit in the fourth quarter. What is really going to be important is how earnings pan out in FY17. Right now, analysts are a bit too optimistic. You are going to see some more downgrades, hopefully, not as much as you have seen last year but some downgrades will be there. However, a lot is also going to depend on what valuations you get depending on what happens in the international markets. So, you could go down to 14 times, you could go up to 16-17 times and that is what is going to dictate the volatility in the market.
Sonia: What does an average investor do or retail investors do at this point? Someone who had started increasing their systematic investment plan (SIP) allocations at the start of 2015, that enthusiasm waned by the end of the year, but in 2016, what is the recommendation?
A: Keep on adding but keep on adding at lower levels. Do not chase the market just because it has gone up 100-200 points in some week. It does not mean the trend has changed. I think the trend is going to take quite some time to change, but at lower level, you will find more attractive stocks, you will find valuations looking more attractive. So, you keep on adding at lower and lower levels gradually.
Latha: Do you see the downside protected at all? I mean I know Sonia asked you about that 7,540 mark, but is it that at least the downside gets protected because we seem to be at least an outperforming market compared to the other economies.
A: Yes, but outperformance is again, it can only happen to an extent and if you see a lot of volatility in the global markets and I expect that to happen and as I am saying, maybe you could even go down to 14 times FY17 and if FY17 is going to be Rs 500, you could conceivably go down to 7,000 although I expect that not to happen. But, if you are really looking at a downside, yes, 7,100-7,200 could be possible.
Latha: What are you pencilling in by way of earnings for 2016 and for 2017?
A: For 2016, we are at about Rs 435 on the Nifty which is still about 3-4 percent below what market consensus is. And for 2017, I think on an optimistic side, it should be around Rs 500 which is about 15-16 percent growth from this year, but it is still below consensus which is around Rs 530.
Sonia: Do you think 2016 could be a year where investors make more money in fixed income rather than in equities?
A: We do not expect too much of interest rate cuts, maybe at best 50 basis points. So, you will have some improvement in yields, but not too much and therefore, even on the fixed income side, it is going to be a pretty moderate year.
Latha: Midcaps will continue to outperform, you think?
A: Only up to a point because quite a few of them are now trading at more expensive valuations than even some of the largecaps. So, as this difference increases, there will be pressure on the midcaps. So, this time you may not get as much outperformance as you got last year.
Latha: Where would you then seek shelter? Would it be IT, pharmaceutical variety at all because pharmaceutical also has been so many landmines?
A: That is the real difficult point here because we do not see even IT outperforming, I think there are too many headwinds. We have been talking about this for quite some time. The whole model for the IT sector is changing and so companies will need to adapt themselves to the new model and that is going to take quite some time and plus you have the global uncertainties which can always impact IT adversely.
Pharmaceutical, I think the best is over for the time being; in fact I would go as far as to say that maybe the bull market in pharmaceutical is over for some time to come, so this sector is also going to be an underperformer. So, that leaves with very little space to hide. I think the best way is to as I said, to accumulate good quality, good company stocks at lower valuations and at lower market levels.
Latha: Any favourites at all in the midcap space like non-banking finance companies (NBFC) which many people seem to favour, anything at all, auto ancillaries? What in the midcap space maybe the relative outperformers?
A: I think I like two sectors. One is the NBFC, some of the housing finance companies particularly and the other is the construction sector where you are seeing a lot of activity happening, a lot of road projects are being awarded and the order books of a lot of the construction companies are improving significantly. So, that sector should do well. Also maybe power transmission is another sector where some of the midcaps should do quite well.
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