The recent correction in the stock market has opened up a buying opportunity for investors, according to Manishi Raychaudhuri of BNP Paribas, who expects earnings and returns to broadly pick up for emerging markets.In an interview with CNBC-TV18, Raychaudhuri said the house had a target for 29,000 by 2016 end, and said investors should consider seeking exposure to four themes."We are bullish on the consumption theme, especially that on the rural side. We also like well-diversified, de-leveraged capex plays. We are positive on private sector banks, especially those focused on retail lending," he said. "Finally, we like the largecap IT space."On IT, which has undergone a correction recently, Raychaudhuri said the street's pessimism has been factored in into valuations."We would bet on firms where the correction has been steep and where there is order visibility," he said.Below is the verbatim transcript of Manishi Raychaudhuri’s interview to Latha Venkatesh and Anuj Singhal. Latha: How are you looking at this current minor correction in the light of the geopolitical concerns and as well, the news that emanated out of Europe?
A: The present correction and particularly if it persists slightly further is actually a very good buying opportunity. I have been saying that our target for the Bombay Stock Exchange (BSE) Sensex is 29,000 by the end of this year, 2016. And it was kind of hovering in that region for a while now. So, the market has suffered both a time correction and actual correction from the recent peak.
As you rightly point out, part of the reason behind that is the geopolitical tension that we have seen, but we are not really concerned that this could have a longer lasting effect on the economy and we are also not concerned that this could negatively impact the flows that we have seen from the foreign institution side.
So, I would on balance consider this a buying opportunity. The expensive market or the premium valuations that the market had relative to Asia ex Japan peers, that has now corrected significantly; we are less than one standard deviation above the long-term average premium. Therefore, on balance, this is a good buying opportunity particularly for the good stocks which have growth opportunities and are cash generative and generate decent returns.
Anuj: Two part question. You said 29,000 for 2016. We are almost there. So, what is next for 2017? And your thoughts on fund flows which have ebbed a bit?
A: You are right in pointing out that the foreign institutional investor (FII) flows have ebbed slightly in the last couple of weeks. That is not an India specific phenomenon though. It has happened all across emerging markets all across Asia. A part of the reason is there are various concerns that are floating around, for example the European banks or about a week ago there was an uncertainty about the Fed rate hike or the timing of it. However, all of this combined together to lead to this small ebb in the FII flows that we are seeing. We could see some risks getting clubbed together in the fourth quarter particularly in October and November in the form of the US election or some of the European countries going into referendums and so on and so forth.
But, over the longer term, I would not be really concerned about flows into the emerging markets and particularly flows into India for a couple of reasons. One, emerging markets, despite the recent rally and the recovery in 2016, are still reasonably cheap. Emerging market equities are far cheaper than developed markets. Second, we are also seeing earnings recovery in emerging markets. It started with Korea and is now percolating down to Thailand, India and even Taiwan. Finally, we think that return on equity which had declined in emerging markets remarkably over the past few years is now beginning to recovery and that is partly on the back of the reduction in capex by the Asian companies which is possibly maintaining their fixed assets at a flat level and at the same time any minor increase in revenue is leading to asset turnover increases. So, all these things are beginning to fall in place together for emerging markets. So, I would not be really concerned even if we see short-term ebb in the FII flows.
Latha: So, in that case, what are you buying? What is your shopping basket?
A: In case of India, we divide them into four silos. The first of these are the consumption beneficiaries. They fall into both consumer staples and consumer discretionary. We are now slightly more tilted towards the rural consumption beneficiaries because of the upcoming harvesting season in October and November. We all know that the rainfall has been good this year. I would also think some of the auto companies would fit that bill.
The second silo is the potential industrial recovers. We know that government infrastructure construction is moving at a solid pace. We also know that foreign direct investment (FDI) is increasing at a rate of 35-40 percent per year. The only piece of the puzzle that is missing is private capex, which we do not think would recovery significantly before 18-24 month period because of the low capacity utilisation. Having said this, even a small recovery in investments could lead to some of the companies benefitting significantly. I would think that the companies that have a finger in every pie, which have a well-diversified portfolio and the companies which are relatively deleveraged would clearly fit the bill. I would also speak about the cement companies in the same breath. That is the second silo.
The third one is the private sector banks, particularly those which are focused on retail lending and finally, despite the fact that the IT sector has been under a cloud over the last 1-1.5 months, we still have not lost faith in the companies and we continue to focus on the large frontline companies in this sector which we think are likely to be beneficiaries of a developed market economic recovery.
Anuj: You said IT, because that looks a bit anti-consensus. There is a risk that there could be further derating because of the business fundamental changes. That does not worry you?
A: Consequent to the concern about orders, we have seen some of the European banks cancelling orders for some of the IT companies, etc, but consequently, we have seen a correction in the earnings per share (EPS) estimates. In fact, I would think that the kind of correction that some of these stocks have suffered off late, that actually open up an opportunity for re-entry on the part of long-term investors. So, in the IT space, I would recommend two kinds of stocks, stocks that fall into two different baskets; first, the stocks that has corrected the most and second, the stocks that have not really faced any major concern about order cancellation or order postponement. And if one searches for stocks fitting these descriptions among the top rung frontline stocks here, the top four, five or six companies in India, from the present levels, investors would still have winners on their hands.
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