If the US-China trade war escalates and the US president orders American companies to source from other countries, India can make gains in textiles and chemicals, says Arun Thukral
We recommend traders to buy at current levels, as there are strong support clusters at 10,800-10,700 on the downside that will likely act as a cushion on the lower side, Arun Thukral, MD & CEO, Axis Securities, said in an interview to Moneycontrol’s Kshitij Anand.
Q) Is growth the biggest worry for Dalal Street? Corporate earnings are unlikely to rebound in the September quarter. Globally, things are muted. Do you think this bearish trend in equity markets will continue?
A) Corporate earnings have been a mixed bag in Q1FY20. Weak demand, tight liquidity, poor spending by the government on account of elections and slow capital expenditure by private players were responsible for misses in Q1FY20 results.
Sentiments also soured due to delay in monsoon. Though the overall performance in Q1FY20 was better than Q4FY19, the weakness in earnings growth trend is unlikely to revert immediately given the tight liquidity in the banking system and trust deficit in NBFC lending. Global trade tensions would also have a bearing on the export demand.
The latest measures by the finance ministry would help improve the availability of funds for NBFCs through capitalisation of PSBs and the credit expansion associated with it.
GST refunds and timely payments to improve the cash flows for the MSMEs, implementation of the UK Sinha committee recommendations on the use of technology to improve transparency in credit availability, etc. would help kick-start the economic expansion in the latter half of the fiscal year.
Thus, the much-awaited earnings recovery is likely to be pushed to FY21, which is more or less factored-in by the markets. Markets, in the near term, are likely to track the global cues, especially the trade tariff war, given the enormity of impact it can have on the global trade and demand.
Depreciation of CNY against USD would also drive down the emerging market currencies, including INR. Hence we expect the markets to consolidate (due to positive domestic developments) with a slight negative bias owing to weak global cues in the near term.
Q) Any sector(s) which could be the dark horse in the next two-three years and why?
A) If the US-China trade war escalates and the US president orders American companies to source from other countries, India has a high probability of gaining market for sectors like textiles and chemicals, etc.
The business shifting away from China is being lapped up by countries like Bangladesh and Vietnam, but they are not self-sufficient in the raw material i.e. cotton.
India is the largest producer of cotton and has raw material security vis-à-vis Bangladesh and Vietnam, who procure the Indian yarn for making the garments they export.
Similarly, China has been producing huge quantities of chemicals which go into processing in various industries.
Lately, we have seen shifting of chemical production due to increased regulation, deteriorating pollution and rising cost of labour. Indian companies, with their strict regulation, better handling of effluents and low labour cost, would benefit from the shift.
Q) What is your call on the currency in the near-term? What is causing turmoil in currency markets?
A) The currency market is quite volatile on account of the trade tension between the US and China. The Chinese currency is sliding due to the tariffs imposed by the US on goods imported from China.
It is estimated that the Chinese currency CNY would continue sliding till the depreciated currency balances the negative impact of higher tariff, which could take it as high as USD 7.5, say another 5 percent.
The move may happen naturally or artificially though not in a secular manner. The weakening of the Chinese currency would lead to the weakening of currencies of emerging markets, including the Indian Rupee. We expect INR to depreciate from this level to counter the depreciation of CNY.
Q) What are the cues you are getting from US Fed?
A) US Fed chair, in his Jackson Hole Symposium speech, has reiterated his stance to take appropriate measures to support economic expansion and also spoke of stronger inflation, thereby dashing market’s expectation of aggressive rate cuts.
The Fed chair mentioned that he is vigilant in the wake of the uncertainty owing to the escalating trade war and said there is no textbook approach to handle the situations. Finally, (Jerome) Powell says the glass is half-full rather than half-empty, as is being portrayed.
Q) This is probably the best time to put your money to work if you are a long-term investor. Do you recall any success story from previous falls?
A) It is a very good time to invest with a long-term horizon. A recent example of slowdown that we saw was in the 2010-12 period, when Nifty had gone down by 15%; the midcap 100 index was down (from its then highs of 9,782 in November 2010) by almost 40%, reaching a low of 6,115 in November 2012.
By May 2014, the Midcap 100 had recovered and reached 9,908, giving (anybody who had invested during the correction period) a handsome return of greater than 40% in one and a half years. If one had held onto the investments for another four or five years, they would have seen a stupendous CAGR of 25% over six years (2012-18). So yes, it is one of the best times to invest for the long term.
Q) What should be investors’ strategy? Do you think it is time to increase the share of fixed income or gold in the portfolio as a fear of recession could hurt returns from equity markets?
A) Investing in gold and fixed income is a good option, especially for hedging and diversifying your portfolio, but it has a limited growth opportunity and is likely to underperform equities over a long-term horizon.
A better strategy would be to invest in quality stocks in sectors which have good prospects.
Q) Many experts advise against catching the falling knife but won’t investors miss out on an opportunity to create wealth? What should investors look for while picking such stocks?
A) Whether one should catch the falling knife depends on what the economic and earnings outlook you have for the market.
We believe that this is a cyclical downturn for the market. A stable government, recently announced growth stimulus, liquidity surplus and slowly getting past the NPA and NBFC problems have now brought markets in a position from where they can give superior returns to investors.
The criteria for any long-term investor should be to pick good quality stocks that have overcorrected in the last one and a half years but have also given a good set of numbers despite the slowdown, have strong and proven management, relatively low debt and the sector outlook of that stock is very good.
Q) The Nifty is down 10% since the budget day, and the small & midcap indices are virtually in a bear market. Do you think Phillip Fisher’s words fit the situation: "The stock market is filled with individuals who know the price of everything, but the value of nothing."
A) Investors do realise the value of stocks but fear and apprehension make people react to price rather than value.
There are definitely a lot of opportunities in the market post-budget day correction, especially in the midcap and small-cap space that have corrected much more and look very attractive at their present valuations. Good quality stocks have overcorrected and it is just a matter of time when investors recognise their value and start buying.
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