A slowing Chinese economy is still cause for concern, Anant Shirgaonkar, Head-India Equities at UBS Securities, tells CNBC-TV18. He sees a high probbaility of the US Federal Reserve hiking rates in September.He expects the market to lower FY16 earnings growth estimate to 10 percent from the earlier 15 percent as the first quarter numbers still do not point to a demand recovery.He says this is a good time to buy for investors having a 12-18 month horizon. UBS is not as bullish on midcaps and small caps as it was a few quarters back, Shirgaonkar says.He is bullish on state-owned oil companies. He is bearish on the IT sector in general and feels the weak currency will only provide a short term tailwind. He sees weak demand and disruptive technologies as major risks for the sector. Below is the transcript of Anant Shirgaonkar’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: What is the view at UBS? Is it that we are in for something very bad in terms of global growth and may be a year from now or a quarter from now all equity market will be trading at lower levels?
A: On the global front our view is that we will remain in muddling mode. What we mean by that is China still remains a concern although on the regulatory front, on the government front we are seeing measure by the Chinese government as we saw yesterday in terms of the requirement reserve ratio (RRR) cut and the bank rate cut that we saw.
The clear indication is that the Chinese government wants to send out feelers to the market that it would take all measures to ensure that there is financial stability. Beyond that we still are looking at the Fed rate hike in September that still remains our base case but given that the macro data point seems to be weakening we would have to see about the pace of rate hikes beyond that. As of now we are still looking at rate hike in September.
Sonia: Since there is so much uncertainty globally, would you advise retail investors or long-term investors raise their cash positions or do you think that this is still a good time to be looking at individuals stocks?
A: Anybody who is investing in the Indian equities now need to keep the broader picture in mind and one of thing that we have been highlighting for some time now is the disconnect between the consensus earnings expectations in India versus what can actually be delivered by the markets. For example in the quarter that just went by we saw the topline of Nifty companies down by 5 percent and bottom-line was down by 2 percent.
Now the street expectations for the full year still remain pretty high at about 15-17 percent which means that in the remaining three quarter we will have to produce 23 percent earnings growth to meet the street expectations. Our expectations are at about 10 percent growth. So, we will have to see over the next few quarters the street earning expectations come down from this 15-17 percent to about 10 percent.
We have seen in the past that whenever the market goes through an earning downgrade cycle typically it struggles to do extremely well. So, we will have to muddle through the next two quarters till we see this adjustment go by. Anybody who has got a view of 12-18 months should take advantage of this correction which might play through and have a longer term view to benefit from Indian equities.
Latha: I understand you all have a Nifty target of 8,600 is that for 2015?
A: Our target still remains 8,600 which is about 10 percent upside because inherently we are still positive on India as a market and Indian economy. We still feel that Indian economy would grow among the fastest growing economy in the major emerging markets that we have seen. Plus the fundamentals in the economy still seem to be pretty robust in terms of inflation coming down. In terms of the possibility that RBI incrementally at some point in time start reducing their rates.
So the back drop for the Indian economy, Indian market still remains pretty strong. However, we will have to endure the correction over the next two quarters especially in terms of earnings downgrade.
Sonia: You are overweight on the oil and gas space and you have a couple of picks over there. What do you think could be the triggers from here on to invest into some of the largecap oil and gas names cause overnight we did see some delivery based buying in names like Reliance Industries?
A: There are couple of things. On the oil and gas space we are still particularly bullish on the oil PSUs because the government has done its bit in terms of deregulations, petrol is deregulated. We have almost completed the diesel de-regulation, so all that seems to be on track and the subsidy thankfully because of the crude coming off has come off to much lower levels than what we had earlier expected. So, oil PSUs certainly seem to have the tailwind behind them and we are bullish on them.
In the private names some of these conglomerate names we would be positive on because the stocks have underperformed over the last so many years and there has been a massive consolidation. Stocks have also become cheap partially because of the crude correcting so sharply. The risk reward we have seems attractive from here in the oil and gas space.
_PAGEBREAK_
Latha: Would it be a good idea now to get into the dollar earning guys simply because the rupee appears to be at long last depreciating?
A: We look at currency only as a short-term tailwind or a headwind. The way we are looking at IT or pharmaceutical is essentially how the sector fundamentals could play out. On IT in particular we have an anti consensus negative bias on the sector. Primarily because we think that the demand is going to slowdown for the IT sector and there is a bit of disruption in the IT space in terms of digitalisation that is playing out, in terms of new models which are emerging and in terms of automation which is going to reduce the space for outsourcing. So, on these counts we remain sort of negative on the IT space.
On pharmaceutical the US Food and Drug Administration (FDA) approval seems to be accelerating. So, we think that prospects for pharmaceutical are definitely brighter over the next two years. On the dollar plays per se I don’t think the calls based on what the currency is going to do but rather how the fundamentals for each of these sectors are playing out.
Sonia: I was just going through some of your midcap bets and within that you have names like Britannia Industries, LIC Housing Finance and SKS Microfinance. These are great companies, good businesses but the stocks have run-up quite a bit. In a market like this where the upside seems to be capped for the near-term you think it still makes sense to buy some of these stocks?
A: We wouldn’t go into stock specifics but on valuations I would agree with you. On the small and midcap space we aren’t really as bullish as we were say a few quarters ago because the stocks have run-up, the valuations are no longer cheap. So, we are sort of equal weight or neutral on the small and midcap space.
Within that there are still areas wherein we can find value may be the housing finance space, may be particularly premiumisation in terms of consumption so these are themes that we still like over there. Plus on a slightly longer term view we are positive on the cyclical recovery with a two-three year view and therefore any of those plays which qualify as cyclical recovery plays we should be able to keep on accumulating now and hopefully they will do well as the cycle plays out with a two to three year view.
Sonia: You are saying that one should stick to the domestic consumption stories names like four-wheeler names, some of these fast moving consumer goods (FMCG) names and they will give you better returns compared to the export led companies?
A: We have a very counter consensus view on domestic consumption, so we are sort of negative on consumer staples and negative on the two-wheeler names that we see. So, basically on the two-wheeler space we think that the pent-up demand in the system isn’t as high as we see in the four-wheeler names. Therefore, we are positive on the four-wheeler names in India and negative on the two-wheelers.
On a broader base we are still negative on consumption. One because we believe that rural consumption is going to be adversely affected because of agricultural income getting affected. Second, the rural stimulus which the government had shown in the previous five years seems to be sort of waning in addition to the minimum support price (MSP) prices being muted.
So net-net rural consumption would be a drag on overall consumption themes and therefore we believe that anything to do with say premiumisation or urban consumption may be slightly better-off but we need to keep a watch on valuations on that front.
Sonia: Another preferred space for you is telecom. Before we saw the market crash the telecom stocks like Bharti Airtel had a good run. Is there more steam left in that space and is it just the frontlines or would you look at some of the other names as well?
A: In telecom we are positive on telecom service providers as well as the tower play. So what we see over there is one that the pricing could have bottomed out. We are seeing that freebies in the pricing front seems to be getting withdrawn from two or three of the large telecom companies and therefore quarter after quarter the margins have been improving for the last eight or ten quarters.
Plus we have seen that the data consumption is growing very string, our projection is that data would actually grow 10 times in the next ten years. Therefore, that would provide an additional tailwind for the telecom names. So, overall very positive on telecom space.
Latha: What are your global guys, strategist and economist telling you? Are we in for some nasty time in next quarter, a serious breakdown in terms of appetite for risk as well as economic slowdown?
A: That is not the base case that we have. What we are seeing is that the market had run-up quite a bit and we have seen some correction that has played out. If you look at the valuations over a longer term period we have seen that for price to equity or price to book for emerging markets or Asia pack, we have started to see some of those measures dip below the one standard deviation lower than the longer term averages.
We are seeing some kind of capitulations or signs of capitulation especially on the equities side. We are not seeing enough of that on the currency or fixed income side. So, what is playing out is that the valuation which had run-up quite a bit has sort of given up in some pockets, they haven’t really given up in some pockets but that is the correction that we have seen so far.
The second thing that is paying out is the emerging market flows seem to be reversing. We have seen about USD 38 billion go out year to date which compares to about USD 39 billion in 2008 which is a quite a stark comparison. We believe that on the equity side quite a bit of that could be behind us. However, our views on the equity side, we are seeing enough signs of capitulations. At the margin we should start looking at emerging market equities constructively. Therefore, within that and within Asia Pacific we are positive on India as an economy and as a market.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
