Still cautious on EMs; stick to defensive stocks: Pratik Gupta

Moreover, if monsoons too are normal this time around then it would aid the rural sector growth and help revive auto demand. OROP and 7th Pay Commission too would aid rural demand, he added.

From an earnings downgrade point of view, he said the worst seems to be over and FY17 could see earnings growth of around 14% if the global economy does not deteriorate and monsoons are good.Below is the verbatim transcript of Pratik Gupta's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Latha: What are the people with whom you have spoken to, while inviting them telling you? We have seen this monster rally that came out of nowhere, is it that the untouchability sentiment towards emerging markets (EMs) bottoming out now and there is a global rebalancing, how do we understand this rally? A: Unfortunately the global risks are still very much there in our view. What has happened however is because after the Budget the one very strong message that has gone out to the international world is that India is sticking to its path of fiscal consolidation, the 3.5 percent fiscal deficit target has been very widely appreciated by international investors. While in some quarters there was an expectations that perhaps the government should let go of the fisc by 10-20 bps but on the other hand there are big benefits of having the credibility especially in an environment where the world is in a very volatile place, there is a very weak global economic growth environment. Now you also have the expectations that the RBI will hopefully step in with its rate cuts either in the next few days or perhaps in the next monetary policy. So that is what is leading to a lot of the positive change. Going into the Budget, we also had a lot of negative positioning, a lot of short positions, people were underweight, nervous, not doing anything until the Budget clarity was out, now that we have had that, we have started seeing some of the money come in.Latha: What is your call on the valuations itself now, would 6,800 be definitely good value, is it a bottom to be respected and as we bounce off, are you using this to buy or are you using this to move into cash, what do you tell your clients?A: It depends on the investors' investment time horizon but our view for the last few months -- we have had a very cautious view in emerging markets and because of that we have been very cautious on India as well. That view unfortunately hasn’t changed. We think the world is still looking very weak, the outlook for Ems is still very poor. Most of our investors when we speak to internationally, they are still talking of continuing EM redemptions, there are still worries over China, the European situation, Fed rate hike.Latha: So it is not a bottom you think?A: You cannot say because it depends on how things -- from a valuation perspective this is also attractive from a 2-3 years perspective but in the short-term, could we go down further? If the global markets come off, absolutely we can go down lower. So right now our future is more linked in the short-term to what is happening globally rather than what is happening just in India alone. India alone does not have any strong catalysts as such to drive the market significantly higher and swim against the tide when you have got such a weak global economic environment.Sonia: Capital preservation was the big strategy that worked very well in the first couple of months of the year, do you think that strategy still holds considering you are still quite cautious?A: Yes, a couple of months back we had said stick to the more defensive sectors, the consumer staple, the utilities, the preference for private banks. That stance largely still holds and that has mainly given our view for a very weak global outlook. Obviously as things go unfold post Budget the view on India is changing to some extent in terms of at least there is an island of stability, some decent earnings growth hopefully as the year progresses and hopefully this year we also get a good monsoon. That coupled with an RBI rate cut or maybe more rate cuts as the year progresses perhaps we could see more interest coming back into India but for time being yes, we still recommend a defensive stance.Latha: Defensive stance would mean IT, pharma or would it also include fast moving consumer goods (FMCG), consumer durables, is there a rural play in your basket?A: Yes, we would include the consumer FMCGs, the rural plays, some of the auto companies, which are rural focused and thankfully the Budget didn’t have anything negative from that perspective. So IT, pharma yes, but more than that the rural plays in particular and pharma, in particular, the valuations have gone up also, you have the USFDA overhang as well. So from a valuation perspective as well, we think the rural plays, the FMCGs, they look much better to us from a defensive perspective.Sonia: Do you think that the Q4 numbers when we get them in late April and May will cause further downgrades in earnings or is that troughed out, what is the earnings growth you are working with?A: More importantly, Q4 the big call for the auto sector is going to be first the monsoons because we have had two back-to-back bad monsoons. So hopefully, we will have a normal monsoon this year that should lead to a pickup in overall especially two-wheeler growth, the rural segment of the economy.Second, there were some concerns about some changes to the excise duty structure, which thankfully nothing meaningful has happened on the negative side. So to that extent, that concern is somewhat alleviated.Third is the impact of the big rural push, the Pay Commission, the OROP payouts, etc. All of that now will help boost auto demand going forward.Last is the CV segment, there you had couple of years of weak growth, we are coming out of trough, we think that cycle continues.We may have one-two months where things are not so great but in general we are heading the right direction.Latha: My point was not just downgrades for auto sector, generally is the period of downgrades over?A: Earnings downgrades, I do think the worst is over perhaps with the exception of banks where you may still have some more NPL write-offs, more aggressive write-offs in the March quarter but in general, our view is for the Sensex for example we are projecting barely 3 percent earnings growth this fiscal year ending 2016 and for FY17 our estimate is slightly cautious than the rest of the street, we are at about 14 percent, the street is somewhere still at 16-17-18-19 percent. We think we are largely there but the big assumption is the global economy does not deteriorate dramatically from here and we have a normal monsoon and we don’t have a big currency crisis driven because of China.