Our estimates suggest that inflation will remain close to or above 5 percent by March 2020, implying that a rate cut in the next MPC in February 2020 is highly unlikely.
The long-term fundamentals of Indian economy continue to remain strong with the expected gradual recovery in growth.
Nifty50 currently trades at 17.9x FY21 which is not cheap, but it can overshoot in the near term on the back of liquidity flows and positive sentiments, Siddhartha Khemka, Senior Vice President | Head-Retail Research at Motilal Oswal Financial Services said in an interview to Moneycontrol's Sunil Shankar Matkar.
Q: About 100 out of 500 BSE stocks rallied 20-222% during the year. Do you think we can repeat this in 2020 or do better?
While the benchmark indices have been touching new highs, not many portfolios are making money. The peculiarity in the current market has been the concentration of the market performance in select Nifty stocks and the big divergence in the benchmark's performance both within as well as versus midcap and smallcap indices. The market has clearly rewarded stocks quality, growth and steady business performance irrespective of their market cap.
A major theme for 2019 was corporate governance and companies with a good, clean management were rewarded handsomely by the markets – a theme which may well continue in 2020 as well. With earnings growth set to improve, we expect more stocks to participate and perform in 2020. A lot of new issues (IPOs) are lined up in 2020, some of which could have the potential to create long term wealth.
Q: Do you expect the market momentum to continue in 2020 and will the Nifty surpass 14,000?
We believe that the initiatives taken by the government and RBI would take time to work on the ground. However, the long-term fundamentals of Indian economy continue to remain strong with the expected gradual recovery in growth and a domestic consumption driven economy. The Nifty50 currently trades at 17.9x FY21 which is not cheap, but it can overshoot in the near term on the back of liquidity flows and positive sentiments.
We expect the participation in midcaps to further increase going forward given their significant underperformance over the last 12 months. Nifty has given return of around 12 percent in 2019 and touched new highs crossing the 12,000 mark - despite the weak macros and slower earnings growth.
We expect the market momentum to continue in 2020 on the back of global economic revival, earnings growth, liquidity and any further announcements from the government to boost demand/consumption.
Q: Banking and financial services led the charge in 2019 on hope of easing NPA worries and likely strong growth going ahead. Do you feel the sector will retain leading charge among others and what are challenges if any?
The loan growth has moderated while the addition of new names to the stressed pool has resulted in an increase to credit cost estimates for FY20. However, the outlook for corporate banks is improving, given the moderation in slippages and the improving operational performance. Revival in credit growth, along with improved pricing power, will help drive faster NII growth, while moderation in NPL formation will facilitate a gradual decline in provisioning expenses.
On the other hand, the NBFC sector is still not out of the woods and it would take another four quarters for recovery. The near term is likely to be a period of consolidation; managements have prioritized further diversification of the liability structure, enhancement of tech capabilities, etc. Thus growth would take a backseat for NBFCs as of now. But the corporate banks should retain leading charge in 2020.
Q: Nifty Auto index lost more than 12 percent so far in 2019. What are your thoughts over auto sector recovery and do you prefer to bet given attractive valuations?
After enduring tough 12 months, auto industry is seeing signs of stability across segment. This is partly driven by high discounts, improvement in availability of finance and rural sentiment improvement. While worst seems to be over, we don't expect secular recovery considering last hurdle in form of upcoming BS6 transition. For the next 12-18 months, our preference remains for PVs over CVs/2Ws as the segment is likely to (a) be least impacted by BS6 transition and (b) face less risk of EVs and competition, in turn reflecting better earnings growth.
Q: Most experts believe the RBI will maintain pause in February policy meeting as well. Do you agree, and do you expect the RBI to lower its growth target further from 5 percent now in coming policy meeting?
The spike in retail inflation and the decline in IIP suggest a continuation of the combination of higher inflation and lower growth. Although there have been minor improvements in economic activity in November 2019, it is hard to predict if the recovery is strong enough to lead to more than 4.5 percent GDP growth in Q3FY20.
Our estimates suggest that inflation will remain close to or above 5 percent by March 2020, implying that a rate cut in the next MPC in February 2020 is highly unlikely. Thus, we expect the RBI to continue prioritizing higher inflation over lower growth. Further, since our projections suggest that inflation will retreat toward 4 percent only by Q3FY21, there is a good probability of a prolonged pause over the next 3-4 quarters.
Q: What are major events to look at in 2020 as most experts feel the recovery is expected to happen in earnings as well as economy?
Three key factors to watch out for in 2020 would be reducing stress in financial sector, further stimulus announcements by the government to boost consumption and overall economic growth and progress in the US-China trade talks.
Q: What are sectors or themes to play in 2020 and which could give hefty returns than seen in 2019?
Going ahead, sectors which we believe would do well are Large Private Banks, Consumer / FMCG, core sectors like Cement and Capital goods. We are bullish on Banks on expectations of asset quality normalization over the next two years. Further, with revival in economy, large private banks would be in a sweet spot to garner larger chunk of the business and may gain market share. Among the Private Banks, we like ICICI Bank and Axis Bank while among the PSU Banks, we like SBI.
Consumer companies would be the largest beneficiary of demand revival as and when it happens and we prefer HUL and Colgate Palmolive. Both Cement and Capital goods sectors are currently trading at around 20.5x P/E - discount to their 10 year average P/E as the capex cycle has yet not picked up. However, once the measures adopted by government start taking effect and capex cycle revives, these sectors would big gainers and we prefer L&T, ABB, Siemens, UltraTech Cement and JK Cement.
Some of the other sectors where investors can look for investing and generating returns over the next 1-2 years are Insurance and hotels. Insurance sector in India is in a sweet spot, where strong structural potential exits as it is highly under-penetrated. We prefer HDFC Life and ICICI Prudential Life. The Indian hospitality industry appears set to enter an upcycle, led by favorable demand-supply dynamics. Currently, industry occupancy (65 percent) is near optimum levels, which in turn, should provide strong pricing power to hotel players. We like Indian Hotels in this space.
Q: What are those factors that can spoil or derail the market momentum in 2020?
Continued or delayed resolution of US-China agreement could impact global economic growth in 2020. Also if there is a no-deal Brexit there could be some pressure in European economy. On the domestic front, corporate earnings have remained muted throughout the year. If the economic growth and consumption demand doesn't improve over the next few quarters - there could be downward risks to earnings estimates for 2020 as well. While we are expecting 12 percent EPS growth in FY20 for Nifty, we are estimating strong revival of 28 percent growth in FY21.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.