The equity markets have registered significant gains since the beginning of this year. Do you foresee a further upside?
For the very near term, we see a limited upside from current levels as the Indian equity markets have already rallied significantly in the past six months. Moreover, the valuations of the broader market are closer to the higher end of the band. From here on, for the equity markets to do well, it is important that earnings growth accelerates.
For the past couple of years, earnings growth has been poor, led by banking sector NPAs and commodity companies. Even defensive companies in the pharma, telecom and IT services sectors did not contribute to growth. Most sectors have a lower base of earnings and are generating lower profits than their potential.
What is your view on the Indian economy at present?
Most of the macro-economic parameters are looking quite good. The consumer price inflation is low at about 3%, and may rise gradually to about 4% by the end of the financial year 2017-18. This should allow some room for the RBI to reduce rates, but it also depends on global factors. Most developed markets are exiting the easy monetary policy, which may force the RBI to keep the rates firm.
The current account deficit (CAD) is quite comfortable and for this financial year we expect it to be 1.3%, mainly due to lower crude oil prices. While the central government’s fiscal position is healthy, there seems to be growing concern about the states’ fiscal deficits, due to the growing trend of loan waivers. While the government continues to progress with its key reforms measures like the GST, growth is still linked to consumption lead, and investment lead growth is yet to pick up.
What are you expecting from the first quarter earnings?
The aggregate earnings growth of the market may not be much in this quarter, as some of the larger companies continue to report lower growth or decline in earnings. We are looking at healthy earnings growth from consumer and private sector financials.
The metals sector is also likely to show strong growth in earnings due to better prices and lower input costs. IT services is likely to report flat earnings. The companies exposed to government spending, such as those in the road infrastructure sector, are also likely to do well this quarter.
Which sectors are expected to benefit and which will underperform with the implementation of GST?
The unorganised sector will eventually benefit from the implementation of the GST as tax compliance increases. The share of the unorganised sector is quite high in some consumer staple sectors like biscuits and edible oil, and in consumer discretionary sectors like adhesives and paints. The companies in sectors like soap, toothpaste and automobiles have also been positively impacted.
The cost of ownership of residential real estate may increase after GST, which could affect the demand for it in the short term. However, in the long term, the GST will have a positive impact across sectors, bringing in efficiency of operations through ease of monitoring, simplicity and unified market.
What is the outlook for the banking sector?
Credit growth will continue to be subdued for another 4-6 quarters due to limited demand for corporate credit on account of high leverage among companies in the power, telecom and steel sectors, and large nonperforming loans (NPLs) in the public sector banking system.
However, we expect moderately strong growth of around 15% in retail credit. Further, private banks and NBFCs are better positioned than public banks to benefit from the growth in retail loans. We continue to like private retail banks even though they are trading at relatively higher multiples.
The corporate banks should be keenly watched despite high levels of NPLs as most of the large, troubled assets are already recognised, and the government, as well as the RBI, are working on resolution mechanisms for large corporate NPLs.
What has been your portfolio strategy of late?
We follow a bottom-up approach in stock selection, and due to overall higher valuations, there are limited opportunities. At present, earnings growth is richly valued as overall growth has been lower. We prefer good quality companies with long-term earnings visibility even at higher valuations.
We are more positive on the domestic consumption linked companies at present as growth in private capex is yet to pick up. Private sector banks have a large growth opportunity as they could continue to take away market share from public sector banks. So, we are also positive on automobiles, consumer discretionary sectors, consumer staples and NBFCs.
How attractive is the bond market and what’s your advice to investors?
The bond yields in India have come down substantially in the past two years, giving good returns to investors. Due to benign inflation and healthy macro-economic indicators, the RBI may further reduce rates by 25-50 bps over the next few quarters. While bond market investors may look for capital gains this year, a large part of the bond market rally is already over.
Originally published on ET Wealth.
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