Do you see a liquidity crisis in the making that can topple the markets?
The recent events that rocked the markets were so far limited to a few financial and business houses. Normalcy will be restored in the lending to the corporate sector in due course, with both the Reserve Bank of India (RBI) and the government ready to address any liquidity issues. It is important that we do not have any contagion effect of the recent events that results in potential ‘solvency’ issues for any of the corporates, as that could hurt the market confidence.
Are the markets prepared for a hung Parliament?
At present, the markets seem to be factoring in the return of the ruling party, albeit with lower numbers on its side. Typically, the markets do not like uncertainty, and if neither the ruling party nor the main opposition party (with their respective allies) gets the mandate, it could open up several uncertainties and possibilities. This may dampen sentiment and cause a knee-jerk reaction among investors (domestic and foreign). Thereafter, the markets would like to see the arithmetic that works out among the parties, the composition of the new government and the immediate full-year Budget before forming a more decisive opinion about the policies of the new regime.
Are foreign investors now viewing the macro data with a pinch of salt?
The resilience of India’s growth amid the ongoing global trade wars and the sustained low consumer price inflation (CPI) certainly augur well for the country’s macro outlook. However, the fiscal deficit and the arithmetic surrounding it are being looked at with a tinge of suspicion, as low GST (goods and services tax) collections and disinvestment puts a question mark on the government’s ability to finance the current growth revival of the investment cycle, in the absence of any meaningful recovery in private capex. Besides, foreign investors are also looking at signs of a big rebound in earnings, particularly in the banking sector; and if that does not happen, there is room for disappointment.
What’s your view on India now?
Our global research continues to maintain its ‘underweight’ stance, mainly on account of valuations and weaker-than-expected earnings momentum. India’s valuations are at a big premium to EMs (emerging markets). And even if earnings support the markets, Indian markets are still trading at a premium to their historical average. A favourable outcome in the elections coupled with some meaningful recovery in earnings can give the necessary confidence to global investors to make an active allocation to Indian markets. Until then, India may continue to benefit mainly from passive investments by index funds, with the resumption of flows to EMs.
Your preferred sectors?
Within equities, we prefer allocation to best-of-the-breed large-cap equities in the first half of the year. We could look at adding beta (including mid-caps) to the portfolio in the second half, in case of a decisive election outcome, or in the first half itself, in case of a steep market correction in the run-up to the elections. Among sectors, we like financials (retail-oriented, select corporate banks, and very selective NBFCs/HFCs), consumption, rural, health care and select industrials. We prefer to avoid telecom and leveraged sectors/companies. Metals remains a tactical play only.
Your views on earnings growth?
We see the earnings growing by 11–12 per cent in FY19 and then improving to 17-18 per cent in FY20, aided by an improvement in the banking space.