Mkts will deliver single-digit return over the year: Jyotivardhan Jaipuria

Jyotivardhan Jaipuria, founder and managing director at Valentis Advisors
As the markets prepare for the government to unveil its economic agenda in the Budget, Jyotivardhan Jaipuria, founder and managing director at Valentis Advisors, tells Puneet Wadhwa most foreign investors acknowledge that India is one of the most promising emerging markets (EMs) from a long-term point of view. Edited excerpts:

Do you expect the markets to undergo some more correction after the Budget?


The markets, especially large caps, are expensive and are building a strong recovery in earnings. Overall, our view remains that earnings will see a recovery led by corporate banks over the course of FY20.  However, weak June 2019 quarter earnings could lead to a pullback in the markets in the near term. That said, the markets will deliver a single-digit return over the year as valuations see a time and price correction.


Your expectations from the Budget?


With the private investment cycle some time away, the onus remains on the government to help kick-start the economy. That said, the government has less room to fund populist programmes outside the Budget. However, funding public sector banks is also important, especially with non-banking financial companies (NBFCs) in a crisis. The government should look at privatisation of PSUs as a means to fund capital spending. A small slippage in the fiscal deficit is okay, as long as that is used for capital expenditure. A roadmap for how it is looking at raising resources over the next five years should also be provided by the government and its commitment to fiscal stability.


Do you think the economic slowdown could get worse?


There are two key factors driving economic slowdown. First is the absence of decision making in the run-up to the general election. With the election over and a vote for stability and continuity, infra projects will be fast-tracked. The second factor is the NBFC crisis and the resultant risk averseness among lenders. This factor could linger for some time and hurt consumption demand as NBFCs slow down their lending and banks are not ready to pick up the slack.


Your expectations from corporate earnings in FY20?


Corporate earnings will see a revival in FY20 with aggregate earnings being in the 12–15 per cent range. This will be in spite of a weak June 2019 quarter. The bulk of earnings growth is being driven by the banking sector, especially corporate banks. With provisioning for non-performing loans (NPLs) behind us, we expect to see sharp earnings growth in corporate banks.


Your sector preference at the current levels?


We are overweight on the banking sector, especially corporate banks. We also like domestic plays linked to growth in infrastructure spending, especially cement and select capital goods. Underweights include consumer staple stocks due to high valuations. We are cautious on the metal sector given the weakening Chinese and global economy. 


Should investors stay away from NBFCs?


The NBFC crisis is leading to a lack of confidence in the solvency of these finance companies. Growth for most NBFCs will be slow over the next year and we are avoiding exposure to them. However, we are positive on banks, especially corporate banks where provisioning requirements are going to ease off. They will gain from the NBFC crisis – both on asset and liability sides. Given that NBFCs are not in a position to lend, banks will find it easier to see credit growth. They could also indirectly see an increase in deposits since many investors have seen their debt mutual funds give sub-optimal returns.


How are foreign investors viewing India as an investment destination?


Most foreign investors acknowledge that India is one of the most promising emerging markets (EMs) from a long-term point of view. However, most are already overweight on India. A series of rate cuts by the US Federal Reserve (US Fed) can be positive for flows to EMs and India would be a beneficiary, too. But within the EM pack, India has to contend with two factors. First, it is an expensive market that is factoring in a sharp turn in the earnings cycle. In the absence of visible signs of an improvement in corporate earnings, flows may lag. Second, weight on India in EM indices could face a slight reduction due to the addition of Saudi Arabia, and a likely continuing increase in weight of China A shares.


Are global developments a cause for concern?


Apart from the NBFC crisis in India, global factors pose the biggest risk to the markets. Overall, the biggest focus from our point of view is whether there is a recession in the US as the bond markets are currently hinting at, or the US Fed does enough to prevent the recession. While a cut in interest rates by the US Fed will be positive for the Indian markets, a recession will hurt markets globally, as well as in India.