PSU banks score over pvt banks; macro picture improving:Naganath

Though benchmark indices are likely to go higher than where they are today, the Indian equity market will not be immune to global volatility, said S Naganath, President and CIO, DSP Blackrock Investment Managers.Despite the fact that global anxiety will persist, general sense of growth, both for Indian economy and equities, has made investors optimistic on Nifty, he told CNBC-TV18. While Indian corporate earnings will accelerate throughout FY17 and its momentum will continue for the coming years, Naganath is expecting a correction in equities of emerging market going forward. However, the Indian market will not be significantly impacted because of its improving macro-economic conditions, he said. If markets do well in the next three years, the banking sector will outperform benchmark indices going ahead, he said. In addition, valuations of public sector banks are better than private banks, he says.Though the overall market has been giving returns, selection will be key for mid to largecap stocks, he said. He is of the view that the consumption theme is going to play now and with better monsoon this year, rural economy will pick up, building demand in the auto space. Moreover, he believes IT and pharma sector will deliver returns but not as much as in the past years.Correction: An earlier version of this story quoted Naganath as saying NBFCs appeared to be attractively valued compared to private sector banks. He actually said public sector banks were more attractive. The error is regretted.Below is the transcript of S Nagnath’s interview with Sonia Shenoy and Anuj Singhal on CNBC-TV18.Anuj: What is your big call right now? Do you think we are still in a big bottom up stock picking market where you get your stocks that you make a lot of money or do you think this market now runs a bit of a risk of going through a correction, purely because you have seen a big rally off late?A: Global outlook, at least the outlook for global equities as I see it, is that you had volatility in January. You had a few months of relative calm and central banks stepped in with policy announcements and more liquidity. But as I have often mentioned earlier, incremental central bank action and policy is having less and less efficacy and shelf life in that sense and therefore, in the second half of the year, I would expect to see more volatility in global equities as you see continued concerns about Brexit or competitive currency depreciation in Asia, slower growth in the advanced economies. So, sometimes in the next few months, you should expect to see global equities to correct again. And that volatility will affect emerging markets.But coming to India, while we will not be immune to global volatility or higher global volatility, any such correction offered by external factors would be a fantastic buying opportunity if you take a 2-3 years view because I do think all the macro is coming together quite nicely for India and as we get into calendar year, 2017 and 2018, I expect to see our benchmark indices at much higher levels than what they are today.Sonia: It seems like you had a fabulous conference here. There was such a big turnout. What has the mood been like because we just saw a lot of influential investors, whether it is Rakesh Jhunjhunwala, whether it is Raamdeo Agarwal, is the mood still very cautious or are people now beginning to put incremental money into the market.A: The general sense I got is that people are very optimistic on India. The Indian economy’s growth outlook over the next few years and therefore, the outlook for Indian equities. Even though there is a fair bit of anxiety about like I said, volatility in global markets. The other thing is that the corporate earnings for Indian companies is likely to accelerate quite nicely in this fiscal 2017 and then continue to maintain that momentum in the years thereafter, which will again underpin strong performance by Indian equity relative to other emerging markets.Anuj: So, what is the big them that you are backing right now? Consumption has done remarkably well. Non-banking finance companies (NBFC) have done phenomenally well over the last two months or so. What is the one big theme? Either of these or anything else that stands out for you?A: My view is that if the markets do as well as I think they will in the next three years, banks as a sector will do better than the benchmark indices. And within banks, I am of the view that public sector banks ought to do relatively better in terms of price performance compared to private sector banks because of the fact of them trading at very low valuations, but more importantly, people are not paying enough attention to the fact that they have a fantastic customer franchise and geographical footprint which as these banks become more and more digital in their approach and get more technology on board in terms of ease of transaction, you will find that the amount of the customer transaction volumes will increase. I saw a statistic recently citing that the number of mobile transactions among PSU bank customers is actually much higher than that of private sector banks even though the value per transaction is much lower than that of the private sector banks. That will increase quite significantly in my opinion over the next three years or so and therefore add more value to the business model of a public sector bank.Sonia: We heard that there was some really good talks that were taking place at the conference today. You attended most of them. What was the highlight and what was the key takeaways from some of the features that you attended.A: Quite a few speakers talk about their views on individual sectors, some spoke about specific ideas, but like I said, the overall mood was very optimistic about the outlook for Indian equities and Indian economy.Sonia: So in terms of sectors and themes, where is there the most amount of interest now?A: I cannot speak for the others. Like I said, if the market does well as I think it will in the next three years, the banking sector or to do even better than the benchmark indices is my view this time.Anuj: One of the funds that has done remarkably well over the last five years is the mid and micro cap fund. Do you see broader markets continuing to outperform? Over the last three or four months, we have seen a bit of an outperformance for the largecaps compared to the midcaps, but do you see a lot of outperformance over a smaller caps and the broader market universe?A: It is difficult to give a generic answer. I think if the market does a certain amount of return, one can say the largecaps, by and large, based on their fundamentals will deliver a return that is around market rate of return as a group. But with midcaps, smallcaps and microcaps, because the universe of stocks is so large, across different sectors that stock selection is really the key in these categories, midcap, small cap and microcap.Sonia: So, apart from banks, is there any other theme that you are bullish on? Everyone is gunning for the consumption theme. Your paint companies, your cement companies. Is that a theme that you are playing as well?A: It is. Consumption certainly is going to do very well, like I said, we should expect good monsoons this year. Rural consumption which has been very sluggish because the two years of suboptimal rains should come back quit strongly. Urban consumption remains reasonably steady and strong. So, consumption, investors always recognise that consumption in India typically contributes 60-70 percent of incremental GDP growth rate. And that trend will be no different this year thanks to likely to good rains in the month ahead.Anuj: What about IT? We have not spoken about IT at all. Infosys has hit a new lifetime high, other stock have done as well , but does it seem, are you still backing IT?A: Relative to the financial sector, and relative to consumption themes, tech and pharma will deliver returns, but perhaps, a little more muted than what they have delivered as sectors in the past couple of years because the focus will turn more to consumption theme and to financial companies and banks so that is the view I have at this point.Anuj: Autos?A: Autos is part of consumption in a sense. So, I would put that in the consumption category.Anuj: In autos, what do you like more, two-wheelers, four-wheelers, commercial vehicles, again A:This is a dynamic that keeps changing, but as a segment, as a sector, I think autos also ought to do well on the back of likely good rains and improvement in the consumption.Sonia: You started off by saying that you are expecting a global correction to come through. If it does play out, what kind of a downside do you see for our market in the near-term? Will it extend to more than 10 percent and will that be a good buying opportunity for retail investors or will they have to wait some more?A: I will not put any numbers to it right now, but like I said, I am expecting a global correction in equities in the next three to four months, certainly before the end of the year, more likely in the next 3-4 months, that is point one. Second, therefore, markets around the world, emerging markets will face some correction, but I can say that Indian equities probably, will have less of an impact or correct much less than other emerging markets in this context, because the macro is improving and likely to have great growth momentum going into next year and the year beyond.