FIIs find Indian market more attractive, says Nomura's Saion Mukherjee

Saion Mukherjee, managing director and head of India equity research at Nomura
After a sharp rally in anticipation of a stable government post the election outcome in May, the markets are now taking a breather and looking forward to the upcoming Union Budget in July for policies to help revive growth. Saion Mukherjee, managing director and head of India equity research at Nomura, tells Puneet Wadhwa that the market expects inflation to be benign in the near term and will not emerge as a constraining factor for growth. Edited excerpts:

What do you expect from the government over the next few months in terms of key policies?

The key near-term concern is slowing economic growth and we hope that pro-growth policies/reforms are implemented. The government should focus on agriculture (Pradhan Mantri Kisan Samman Nidhi Yojana is now extended to all farmers) and the rural economy in general, and infrastructure buildout. However, we are concerned about the limited fiscal space, which is accentuated by the current slowdown. The government may have to tone down its tax revenue estimates and needs to step up divestments to mobilise resources.

Are the markets prepared for a deficient monsoon and the possibility of higher inflation?

The market expects inflation to be benign in the near term and will not emerge as a constraining factor for growth. Deficient monsoon is just one of the many factors that can influence inflation. However, that may not be the key determinant in the backdrop of slower economic growth.

Your stance on the financial segment after the recent turn of events at DHFL and the overall liquidity issue.

We are positive on the banking and financial space. The current liquidity and NBFC issues are not likely to lead to a systemic issue. We expect the Reserve Bank of India (RBI) and the government to monitor the situation and step in, if the need arises. Fall in bond yields and RBI actions would lead to lower cost of fund for some of the quality financial intermediaries. There may not be a proportionate decline in lending rates, thereby positively impacting margins for such companies. The monetary policy will remain supportive of growth. Expect quality rate sensitives stocks to do well.

Do you see foreign investors allocating more to India over the next few months? What are the  concerns?

Our interaction with foreign institutional investors (FIIs) suggests that the election outcome was a key event risk that they were concerned about. Therefore, FII inflows post the elections are in line with expectations. Meanwhile, there is rising concern around economies that are impacted by escalating trade tensions. On a relative basis, FIIs find India attractive.

Are they worried over the fiscal math worsening over the next few months?

The fiscal deficit is an area of concern for sure. The fiscal room is limited, particularly if one considers that the combined deficit of the central and state governments and off-budget borrowings by the government institutions. This concern is mounting, especially as growth slows down. Nomura has an appreciating bias for the rupee given comforting current account deficit (CAD) and FII inflows.

Do you think a meaningful recovery in corporate earnings will take time?

The slowdown in consumption has started to adversely impact corporate earnings over the past two quarters. Earnings for the consumer, auto, media and healthcare sectors have been below our estimates. Earnings growth for Nifty50 stocks has been just above 9 per cent on a year-on-year basis in the fourth quarter of FY19.

For the past five years, Nifty earnings growth has been in single digits. The consensus expects an acceleration in earnings to be above 20 per cent in FY20. Almost half the incremental earnings will be driven by financials, which we think can be delivered on a low base. Though there are risks to earnings due to the economic slowdown, we expect an acceleration in earnings growth in FY20.

India’s corporate earnings-to-GDP (gross domestic product) ratio is at a multi-year low. Historically, over the medium term, we have seen a strong inverse correlation between earnings to GDP ratio and subsequent earnings CAGR (compound annual growth rate). We are constructive on the earnings outlook from a two–three-year perspective.

What’s your view on mid/small-caps?

We recommend the stock selective approach and find stocks attractive across market capitalisation. We remain overweight on the financials (corporate banks and insurance), the infrastructure, the oil and gas, and the healthcare sectors. We are underweight consumer staple, information technology (IT) services and NBFCs. We think the consumption space is adversely impacted by a slowdown in income growth (pay commission impact reducing), lagged impact of higher oil prices and indirect impact of the slowdown in investment. Some of these factors, like oil prices and income effect, will start to wane going ahead.

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