We believe that superior returns in the near-term would come from structural growth stories largely from identified spaces like consumption, financials and auto/auto ancillary space.
We believe that superior returns in the near term would come from structural growth stories largely from identified spaces like consumption, financials, and auto/auto ancillary space, Gaurav Dua, Head of Research, Sharekhan, said in an exclusive interview with Moneycontrol’s Kshitij Anand.
Q) RBI’s MPC raised interest rates for the first time in the last 4-1/2 years. What is your house view?
A) RBI hiked policy rates by 25 bps with neutral stance which might slightly differ from our expectations. The measures announced to boost credit growth and housing sector are positive highlights from the policy meet. Likelihood of the inflationary pressures and weakness in the rupee seems to have influenced the rate hike decision.
Q) After the rate hike how do you see any material impact on markets?
A) Volatility has increased on the back of global cues. But, that’s only one part of the story. More importantly, the macro conditions have turned unfavourable for India given the concerns related to fiscal slippages and firming up of bond yields globally.
This essentially means that not only the phase of expansion in valuation multiples (PE multiples at index level) is behind us but there is a growing risk of de-rating of Indian equity market.
The only support comes from the possible revival in earnings growth in the coming quarters. Given the situation, we retain our stance (put out in beginning on of 2018) that the returns in CY2018 would be quite sober as against strong gains in 2017.
We believe that benchmark index level, Sensex/Nifty, could remain in a consolidation phase. However, we could continue to see pressure in midcap/smallcaps especially in cases where the last year’s rally was not backed by fundamentals.
Q) Any five (5) multi-baggers that you have identified in the current market conditions?
A) We believe that superior returns in the near-term would come from structural growth stories largely from identified spaces like consumption, financials and auto/auto ancillary space.
Q) Do you see any major global risk for the market?
A) Give the pain points emerging in Europe and continued uncertainty in the Middle East, the probability of ‘Risk Off/Risk Aversion’ kind of scenario has increased considerably in the past few months. On the brighter side, the economic data-points from USA are quite encouraging and could support global growth in 2018.
Q) Do you think FY19 will see a revival in earnings or is there a chance of a downgrade in earnings?
A) We do believe that fiscal year ended March 2019 would be a turnaround year for corporate earnings. Our stance is in line with street optimism due to low base of last couple of years and the signs of strong revival in consumer demand (both urban and rural) in Q4 results.
The high-frequency economic data-points like auto sales, air traffic growth, hotel occupancy, petrol/diesel consumption etc. suggests better times for consumption-driven companies ahead.
The firming up of commodity prices (or stability of metal prices at a higher level) would also add to overall growth in earnings. But, the biggest push to earnings growth is expected to come from a reversal in fortunes of the banking sector as provision related losses reduce and add to overall earnings going ahead.
Q) What is your call on crude oil?
A) Difficult to take a near-term call on crude oil prices and we are no experts in this area. Our base case assumption is that crude could average around close to USD75-80/barrel over the next couple of quarters.
Q) Do you see inflationary pressures due to higher crude oil prices which RBI has also cautioned?
A) In addition to crude oil, the implementation of salary hikes by state governments and central government undertakings (PSU) along with better rural demand driven by normal monsoons, are adding to inflationary pressures in the economy.
The firming up of bond yields is also an indication from the bond market that the central bank is behind the yield curve and it essential means possible rate hikes of close to 50 bps over the fiscal FY2019.
Q) Do you see further pressure on currency in 2018?
A) Weakness in the rupee is likely to sustain in the near-term. Any large foreign outflows driven by rising risk aversion globally could push INR to 69 levels against the US Dollar in the coming months.
Q) What do you expect from Modi government ahead of General elections 2019 and what should be investors’ strategy ahead of General Elections 2019?
A) We expect the Modi government to turn its focus on programs related to easing the pain of farmers and other weaker sections of the society over the next one year. It could be in form of higher minimum support prices, food subsidy or other way of giving more money on hands of consumers.
Thus, the strategy at portfolio level should be to remain overweight on consumer demand is driven companies and some of the exporters (like IT Services) due to benefits from the expected sustained weakness in rupee.
Q) What is your call on PSU banks? Are they a buy after double-digit correction?
A) In the past few quarters, bulk of bad assets has been recognised and adequate provisions made by public sector banks. However, there is still risk of additional slippages from certain sectors and also inability to raise required capital.Thus, we continue to remain cautious on public sector banks and believe that any exposure should be restricted to large banks like SBI or Bank of Baroda.
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