Bettering 2017 returns will be challenging: Motilal Oswal MD Navin Agarwal

Navin Agarwal, MD, Motilal Oswal Financial Services
The Indian markets have extended last year’s gains but 30 per cent returns in 2018 will be challenging, says Navin Agarwal, managing director, Motilal Oswal Financial Services. In an interview to Samie Modak, Agarwal says the optimism on the Street hinges on improvement in earnings recovery. Edited excerpts:

After rallying 28 per cent in 2017, the Indian markets have risen another 7 per cent at the start of 2018. Do you think we are entering bubble territory? 
No, we are not. While market is trading at rich valuations, given the underlying expectations of an earnings recovery and a strong start to the earnings season, we believe there is more upside to this market. However, given the one-way rally since the start of 2017 without any significant drawdown, the possibility of intermittent correction can’t be ruled out. Certain segments in mid-caps are trading at a significant premium and some caution is warranted in that space.

What is the reason for the optimism on the Street? Do you think we can better last year's returns this year?
Predicting near-term returns is always fraught but a repeat of last year’s 30 per cent rally will be difficult, if not impossible. The current optimism is underscored by expectations of an earnings revival after the earnings drought of the last three years. Our research team is forecasting a 19 per cent compound annual growth rate (CAGR) in earnings for Nifty companies over FY17-20E. This, coupled with continued momentum on domestic liquidity, is keeping the markets buoyant. Also, structural, disruptive, and transformational reforms like the goods and services tax (GST), demonetisation, and Real Estate Regulatory Authority (Rera) Act are behind us. This should also bring stability to profits of India Inc. 

How are things looking on the ground? Are you optimistic about a sharp revival in the economy and earnings?
Yes, I am. Consumption recovery is one of the key themes for 2018. Rural consumption is expected to recover, given the favourable underlying drivers of the monsoon, minimum support prices (MSPs), government spending, and healthy real rural wage growth. We also expect asset quality woes in the banking system to end in 2018. The progress on the Insolvency and Bankruptcy Code (IBC) should bring more confidence as far as state-owned banks are concerned. On the infrastructure side, we expect a gradual recovery in private capex. Our in-house economist predicts a gradual recovery in GDP growth. A pick-up in private capex investments will be a key indicator from a near-term perspective.

How should small investors play the market? Do you advise fresh investments at current levels or should one book profits?
Small investors must have a long-term outlook to benefit from the secular and multi-year India growth story. Given the valuations the market is trading at after the rally of 2017, it is advisable for small investors to play the market via the mutual fund route. Investing in a systematic manner is more beneficial from a long-term perspective because it precludes the risk of sinking a lump sum at rich valuations.

Do you think inflows into mutual funds will continue?
We are positive on the mega theme of financialisation of savings unleashed by structural and transformational reforms in the economy. Given the massive under-allocation to equities in the wealth pool of India and muted returns in fixed income and real estate, we expect investors to continue to allocate their savings towards financial assets and within that we believe mutual funds will receive their fair shares.

The capital markets business for Motilal Oswal has shown good traction in the December quarter. What’s the outlook for the broking business?
We have seen strong traction in our capital markets, investment banking, and asset management businesses. This was due to the tailwinds created by the stock market rally, coupled with sustained domestic flows into equities. Additional tailwinds of increasing financial savings and rising financial literacy accompanying higher incomes should boost the broking business. The experience of broking businesses in other Asian economies during this economic phase provides a similar template of growth

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