'Nifty yearend target at 9,500, short-term risk notwithstanding'

The duo was joined by Geoff Lewis of Manulife Asset Management, Jyotivardhan Jaipuria of Veda Investment Management and Ajay Bodke of Prabhudas Lilladher.Below is the verbatim transcript of the interview..Anuj: What is your sense, should corporate India get worried or do you think we will move on. Yes, it is a big negative but we will take it in our stride and move on?Kidwai: If you look at the impact right now and if you evaluate it in terms of exports to the UK just 3.3 percent of India's exports actually to the UK. The broader impact is if you look at a weakness in terms of trade across the EU where the EU accounts for 16.2 percent of India's exports. So, if there is indeed as is feared a slowing UK and a slowing EU and that impact on India would be felt by some companies, but in the near term for Indian companies that are manufacturing in the UK maybe even an advantage as the pound weakens and they in fact export out of the UK into other markets. So, a mixed bag but certainly it is nothing that would break the bank.As I might just add here the more critical aspect is how we manage our macro fundamentals. If we continue to push through key reforms, if we preserve macro stability, if we encourage growth we look stronger. It is a time where the markets are jittery and our strength could shine but any weakness from us as a country particularly given the transitions we are seeing at the Reserve Bank of India (RBI) etc could in fact impact us negatively. So, we have to tread carefully and tread with strength.Reema: But you don't believe that the Brexit presents a systemic shock to the financial system on par with the Lehman Brothers collapse?Kidwai: No, certainly not at par. Because the Lehman collapse had very serious implications across the banking sector. The whole payments mechanism was actually under threat. This is really much more in terms of impact on trade and a lot is going to be determined over a period of time where we don't quite know how the UK-EU negotiations sort out or the indications right is the EU would like an earlier settlement that maybe the UK is requiring. But the view is that the impact would really be felt over a couple of years. So, the impact on the India and the one would we trade and of course in the immediate situation right now which is around volatility of the currency and volatility of currencies would be driven of course by the pound but even more so by China and the way the People's Bank of China (PBOC) reacts to what is happening to all of this. So, currency volatility will impact all financial transactions. But I don't see this as something that is as earth shattering as the Lehman crisis, disappointing as it may be.Anuj: What about fund flows because that is the most immediate worry right now for equity market that will we have a scenario where Foreign Institutional Investors (FII) money goes to safe haven and leaves emerging markets, and in that case even India would be vulnerable. Do you think the risk of that is high right now?Jaipuria: Yes, that will be the first instinct that okay, there is like uncertainty and whenever there is uncertainty money flows to outside emerging market. It goes to what are safe haven. But just for that let me touch on the fact that Naina has raised which is the currency. So, if you see our market rally from the end of February that was global rally. It was triggered by the fact that the US dollar stopped appreciating, it started a phase of depreciation and along with that we had commodities rallying, equity markets rallying and things seemed very good. That trade will probably reverse and that is the risk for global markets, just now that is the risk for Indian markets that you have a spell of US dollar again appreciating, commodities start to come off and probably equity markets start to come off at the same time. So, India     probably relatively it will be like Ajay said there is the monsoon but the immediate impact maybe if global markets go down and what we have to remember is if this is a phase where we have had a very strong rally in the last three months, markets are looking expensive in India, they are in general looking expensive in most parts of the world. So, you could see that as a pullback coming to and Brexit providing that reason for the pull back. Anuj: Are we being a bit complacent, because I remember in 2008 as well post the Lehman collapse I remember hearing a lot of voices that our domestic fundamentals are strong and yes, it is a bit of a negative factor but we will move on and of course we saw the kind of brutal fall that we had. Yesterday none of the markets ended in the green. In fact the US market closed at low point. Yes, the FTSE recovered but rest of the Eurozone markets ended 10-12 percent lower. If it keeps happening at some point it will impact the markets, right?Jaipuria: Yes, like I don't think any of us are making a case that Indian market will keep going up if global markets are falling. So, I said this at the beginning of the year also that the biggest risk for India this year is not domestic factors but it is going to be global factors and probably this is one global factor. Like for me like the two near term points would still be, one is more noise from not just other countries in the EU but even within the whole UK on people wanting to leave the UK and things like that. So, there is that political risk which will play out and the second is like I mentioned the currency.So, if we continue to have this US dollar, which now starts to strengthen and we saw a sign of it on Friday then probably all markets globally and India will be part of it will start seeing weakness and there will be uncertainty. Specially because this comes at a time where we have had a very sharp rally everywhere in the last three months. So, to that extent we can get a correction.Like you said at the beginning of the program that ultimately after Rexit and Brexit you have seen the market fall by less than two percent in the last one week. So, it is not like we have priced in a lot of these events.Reema: All our expert have said that uncertainties perhaps going to be the only constant. So even though the India's domestic picture looks a lot better, is it possible that the shaky global picture will cap India's upside even if perhaps we see a marginal improvement in corporate earnings and the monsoon as per expectations is normal. What's your sense about the upside for the Indian markets?Kumar: First up it is absolutely no doubt, whatever the fundamental connectivity and the impact which might be over the next 1-2 years that we will figure out, but in the immediate term you do have greater risk aversion and that is going to result in some negative impact on short term flows. While I hold the view that indeed lot of the domestic factors are improving, that will going to result in corporate earnings improving and monsoon will be a factor and whole lot of other things. It is not unreasonable to expect that in the short term that is next 1-2 weeks you could have further downside in the market, so with Nifty probably testing 7,500-7,600 levels in the short term.For the year as a whole as you been elaborating that there are growth driver which are there and once we get through this phase of uncertainty, I will hold on to my expectation that in this year somewhere sometime we will see 9,500, so that's probably how I would look at the market that yes next 1-2 weeks is when the uncertainty will probably play out the maximum in terms of flows and sentiment and then we will get back to looking at other factors as your first speaker said that in two months' time probably will be looking at whole lot of other factors then Brexit.Anuj: Elaborate on that 9,500 point again, because at 8,500 market will look expensive, so at 9,500 are you saying that earnings will pick up dramatically over the next 2 or 3 quarters or the valuations will expand, what would explain this 9,500 call by the end of the year?Kumar: My sense is that over the last two years you had lots of earnings disappointment. At this point of time we probably looking at 16-17 percent growth in earnings in India and there is a fair possibility that for that to be achieved, but what I am looking also is that in a world probably where you don't have as many pockets of growth in terms of larger markets. Once the risk aversion settles down post this event clearly there is going to be immediate impact on risk appetite, but once that settles down, I would think you also have supports from domestic flows you are seeing fairly strong flows into domestic mutual funds and interestingly as this event unfolded over the last day or so, what I did see is across various category for investors domestically, looking at it also as an opportunity and recognising that there could be some short term downside, but how can they get in because there has also been in India along with other markets and there was whole lot of investors who are not invested in the market, so I am looking at that also as a trend that there is support of domestic flows and as and when risk appetite settles down post this event that you will get flow support from the foreign side as well and growth basis we are recovering in terms of earnings growth and on that if the monsoons are good and other factors play out, I am looking at a phase next couple of years where versus earnings disappointment, could there be earnings surprises on the positive side is what I am looking at over the next one to two years.Anuj: What about market, we saw European markets were down quite a bit. Yes FTSE was resilient but then it's more of Europe problem than UK's problem. Do you see lingering uncertainty for a prolonged period which may not be good news for market. What do you think the market is in a frame of mind where it will keep climbing wall of worries and keep hitting new highs?Bodke: I said it when the progress of monsoons in the first 15 days of June had slowed down then it is neither Rexit nor Brexit, but if the rain exit that people should be concentrating more on, because we forget that 60 percent of Indians still depend on agriculture and allied activities and we have had two years of successive monsoon failures and hence the rural demand that needs to kick in to take the growth to a higher trajectory is absolutely important from the perspective of the aggregate demand for the economy. Also I think there are two or three factors that I need to highlight on. First is that unlike the Far Eastern economies like Japan which saw far bigger plunge, South Korea, Taiwan that's because 60-70 percent of their gross domestic product (GDP) is net exports.In India's case we are primarily a domestic focussed and domestic demand led economy which 70 percent of our total GDP being domestic consumption and a fall in crude prices and industrial metal prices spells good news for India, at least crude prices spells very good prices for India, because every 1 dollar fall means a one billion dollars of savings on the import bill. That improves the trade and current account deficit which short of helps in terms of our macroeconomic sort of stability and a lower commodity prices in my opinion will dampen any imported inflation and will aid RBI in its pursuance of monetary accommodation and lastly let's not forget that we have record forex reserves, we have a very fiscally prudent government that is adhering to medium term fiscal consolidation plan allaying any apprehensions from FIIs front about fiscal profligacy and lastly we have had the largest FDI inflows in the world.Anuj: I take your point on the domestic fundamentals. But my worry is more for the near term. The market does not like uncertainty and right now the only thing that is going to pick up is uncertainty, specially about the Eurozone area. What is the downside for this market? In the long run it might align with the domestic fundamentals and move on but just in the near term what should one be prepared for?Bodke: I personally see that if there is a large outflow for emerging markets and obviously India cant remain immune but as I spelt out in detail in my first reply on a relative basis we will still be far better off as compared to the export oriented economies and hence investors will take note of that. At the same time what will be crucially watched is the appointment of the new governor by the government in a couple of months from now and as long as the government appoints a governor that the market believes who has the ability to conduct an independent monetary policy the markets will give a thumbs up for that.Also you mentioned that the next parliamentary session is very crucial and some of the key pending economic legislations like Goods and Services Tax (GST) will be closely watched for. The Committee of Secretaries is also expected to give its report on the seventh pay commission award and those pay checks will start flowing into the pockets central government employees, sometime in August, September and then after harvest in October-November the rural demand which has been compressed for nearly two years is expected to rebound sort of in a large measure.So, we have a whole series of events from now till the harvest which will start impacting the aggregate demand in the economy, that is why it will be very crucial to see the corporate earnings how they pick up because even now I feel that the public sector banking space and the corporate focussed banks still have a quarter or two of pain left to go and that is why it will be difficult to hazard a guess about what kind of earnings growth can be pencilled in for FY17 unless one gets a handle on how that part of the metrics turns out for the financial year.Reema: Yesterday we woke up to a rude shock there was massive selling in the global markets, is quite likely that the UK and perhaps even the EU might go into recession, but is it possible that their impact would be a bit more localised and we are over exaggerating the impact?Lewis: I think that's absolutely the case, we will wake up a couple of months from now and wonder what the fuss about Brexit was all about. Yes, this is a monsoon season and there is a statistical evidence from econometric models mostly relating to the United States that suggests uncertainty can have some negative impact in jobs, but it tends to be shallower and more short lived than what fundamental economic shocks like doubling of the oil price, nothing really changes there will be some negotiations about a memorandum of understanding, the EU cannot push the UK out until the UK is ready to sign Article 50 and then there is two years of negotiations. In practice the talks will take longer, the public will soon lose interest, trade channels in the meantime are lot really be disrupted, so in a sense couple of months from now we realise its business as usual and this Brexit was never a Lehmann 2.Reema: It is quite possible now that couple of the other European countries may follow UK suit and look to exit the European Union? Is it time that the market should start pricing in an EU disintegration and if yes how should we price it, what could be the potential impact of a breakdown of the EU?Lewis: That's a question quite a few people in the media have been asking. I think its part of this sheer uncertainty and we just don't know what the playbook is, but I think it is wrong to assume it is going to be a question of follow my leader. Greece after all has gone through a lot of hardship and austerity and now for them to leave would be a bit pointless. We still have other countries that are queuing up to join the EU like Macedonia and some of the Balkan countries and it is not so much the Britain has all the problems now after Brexit, there were a lot of structural problems in Europe. They had a pretty poor record of sort in their economies and their banking systems out after the global financial crisis. They came in for lot of criticism from the IMF. France and Germany didn't come clean with the non-performing loans (NPLs) in their banking system.If you think back to 2010 the IMF was saying about a USD 1 trillion of debt we can't locate, so Europe has to get on with it as well. I think probably Brexit almost causes more problems for Europe I think thank for the UK. There are lot of structural problems related with the Euro zone and the single currency. They started to make progress with the single banking regulator and so on, but they haven't made any progress on the fiscal side and they still stuck to austerity, which is not a good policy when you are basically in a very low growth regime.  So the UK now is free of those. It is always going to do better having its own currency, Sterling. I am pretty optimistic really that the UK is not going to have anything like the kind of deep recession that the Treasury and the Bank of England have been warning us about.