With Assembly polls done, investors to focus on Budget, oil price and US Fed: Edelweiss

He further said economy is in an uptick mood, citing government's initiative on affordable housing, good auto sales in past month, etc. The government will go for more divestment in 2018.

In the last three years, the government has been more focussed on fiscal consolidation and that is expected to continue, he feels.

Rashesh Shah said more and more investors want to take exposure to equity due to confidence on economy growth and corporate earnings. They are not only investing in gold, but also in equities, bonds, ETF, debentures etc.

Financialisation of household savings and its small shift towards equity will have sharp positive impact on stock market going forward, he believes.

Shah said foreign flows, which have been lagging behind domestic flows, should improve in 2018. The total allocation of FII flows to emerging markets came down in 2017 due to strong growth US and Japan.

He further said the US dollar is falling which is good for emerging markets. The FII flows into EM and India should be strong in 2018.

He feels domestic flows are very strong than FIIs, should be twice that of FII flows in 2018.

Last 3-4 years, the news of stressed assets was a big hangover for the market, Shah said, adding the bank will continue with provisioning cycle for one more year and resolving of bad assets problem will take another year.

It means the stressed assets problem will get solved in two years and banks will have enough capital to grow by second half of 2019.

He believes banks will not see more than 50 percent hair cut due to bad assets as good news is that underlying assets of steel, cement, roads and power companies are of high quality.

"We remain positive as process is going very well. Before March, banks will get buyers for 3-4 bad companies," he said.

Below is the verbatim transcript of Rashesh Shah's interview.

Latha: What is typically now the investor mood, do you think now we go on to look at earnings and things like that or do you think now there can be an enthusiasm that the NDA is firmly in the saddle and therefore you can expect more rallies in the market?

A: I think overall obviously investors are heaving a sigh of relief because this has been for the last few weeks a very intense campaign and given all the media reports that were coming out, there was a little bit of apprehension which was also partly not incorrect. So I think investors will heave a sigh of relief but I think the focus will go back on the upcoming Union Budget for 2018, but also on the macro global factors like for example oil price and the US interest rate hike.

Quite a few people think that in this year the Fed will hike at least another 75-100 basis points and that will have a big impact. We have seen oil price now becoming a major factor and the more and more investors we talk to, the issue of oil price and its impact on India, on inflation, on the government fiscal deficit, all of that, have started to creep in. So I think these two factors will now dominate the investor sentiment going forward.

Latha: The few bumps that the stock market had was when the fiscal deficit seemed to be rising. Will the market be confident that the fiscal will be reined in?

A: I think the economy is on an uptick. The auto sales numbers for October-November have been very encouraging. Even the affordable housing initiative of the government is taking off. So I think the economy is on an uptick. Even government will, I think even in 2018 will garner a lot more resources out of divestments like they did in this year also. So, given all of that, the risk on the fiscal side are not as much. This government has shown for the last three years that they are very careful on fiscal because they understand the impact on inflation.

The only part of fiscal that may creep in would be the minimum support price (MSP) rise that happened this year because government will obviously be very conscious of the rural distress and making sure that farm prices, and farm incomes do well. So I think it will be a good balancing act, but I don’t think government will slip on the fiscal deficit at all and there a lot of positive things happening for the government overall that they would not have to resort to a huge amount of increase on fiscal deficit. In fact they will continue on the fiscal consolidation path and that will be good for the economy and for investors.

Anuj: You have a mutual fund arm, you have a wealth management arm, you have a brokerage arm as well and your company has been sort of a proxy, has reflected what has happened in the stock market over the last three or four years. Do you see this equity cult in India which has started over the last one year, two years gaining momentum in 2018 now that we have these state verdicts as well?

A: I think even what we saw today morning that in spite of the huge apprehension and all, the fact is that more and more investors are looking to increase their equity exposure, more and more people are waiting to buy on corrections in the market and that is largely because A) I think the confidence on India growth story has gone up, but along with that the fall in inflation, the fall in bank deposits, so think the two big themes in India that have been playing out, what we call the financialisation of household savings and the second one is the democratisation and expansion of credit.

I think these two parts, because the households and the retail individual investors on both side of the balance sheet, they are borrowing to buy homes and cars an all but they are also having surplus investments which they are not investing in gold and real estate and also not investing only in bank deposits. They are coming for buying equities and bonds and mutual funds, and insurance and all of that. We think this is a secular trend. It might have some hiccups here and there, but overall, for the last 10 years this trend has been going on and I think for the next 10 years on a secular basis this trend about financialisation of household savings should continue.

We should remember that the household wealth has now crossed USD 5 trillion, so Indian households have a reasonable amount of wealth and even small shifts in that towards equity will have a big impact.

Sonia: We have been lacking a trigger as far as foreign flows are concerned in our own markets. Of course there has been a global rally, but we have not seen much as far as foreign flows go in the Indian markets. Do you think that could change in 2018?

A: It should improve and last year India still got a large share of what flew into emerging markets. Unfortunately, the total allocation for emerging markets came down because all the other markets, the US market, the European market, the Japanese market, all of them did very well and home markets are doing so well, flows into emerging markets and all come down. However, fortunately, the US dollar has been falling which is a good thing for emerging markets. So I do think that in 2018 if this continues, then flows into emerging markets should be stronger and amongst emerging markets I think India for 2017 got the highest allocation, for 2018 should also get a very high allocation.

However, as we have always seen, I think now we are at a stage where the local flows are playing as big a role if not even bigger role in the trend in the market because we expect that the flows into equity mutual fund this year will cross about Rs 1,00,000 crore and that itself is actually more than maybe, it is about 1.5 time what the FII flows are. So increasingly the Indian domestic flows will be twice the global flows that we would expect in 2018 also and that means that how we see interest rates in India, how we see the allocation to equity in India will play a very strong role in this.

Sonia: You spoke about your view on the market overall, but just drilling it down to granularity, the Reserve Bank of India (RBI) is trying their best to resolve these 28 stressed asset cases and a lot of people now believe that this is sort of a turning point for the PSU banking space. Would that be your view as well?

A: Yes absolutely. If you see, I think last three to four years, the stressed asset has been the biggest hangover on the PSU banks. It has held back growth, it has taken away profits for the provisioning part of it. Our estimate at Edelweiss is that the provisioning cycle has another four quarters to go because the banks have provided for the last three years, I think another one more year that they have to provide and in the next four quarters they would have provided enough for whatever haircuts because in stressed asset if Rs 100 of the loan has become stressed, it is not that you lose all Rs 100. You sometimes have to take a haircut of Rs 40-50. So, it is very important that you provide for that.

So, I think the provisioning cycle will be over in the next one year. Also then resolving this debt will take another one year after that. So, in the next two years, we think provisioning and the resolution will be over. In this timeframe, the banks will start looking towards growth and I think the recent bank recapitalisation is a big boost because part of that will allow them to provide aggressively and get to that part out of the way very quickly but also have enough capital for some amount of growth especially on the retail credit side where a lot of PSU banks have been wanting to grow.

Latha: A two part question finally now on this issue, would banks have to take larger haircuts. You would have some idea of what people are ready to pay for the stressed assets. So is 50 percent enough, or should they have to take more for the marquee assets, the 40 of them which are with the NCLT?

A: I think the good news is that the larger cases like the steel companies and the cement companies we have, the underlying assets are very high quality. So I don’t think in those banks will have to take more than 50 percent haircut. In fact in couple of them, we think the actual resolution might be somewhere between 60-70 percent also. So overall, I think in the larger ones, the good news is the haircuts are not more than 50 percent.

On smaller cases which is about Rs 8,000-10,000 crore of exposures, haircuts might be more. I think the assets like steel, cement, roads and power assets, usually they will not have very large haircuts and they are the large part of the stressed asset. So overall we do remain positive. I think the banks will provide somewhere between 50 and 60 percent of the exposure as per RBI formula and we think that should be more than enough to cover any of the haircut that they have to take.

We do believe that the process is going very well. I think in NCLT, the first 12 cases which are there, we are very positive that at least before March, we should get buyers for three or four of the large cases and there will be good news for the banks and obviously for the investors.