Though the worst seems to be behind us, it is going to be a slow path towards normalisation - Nischal Maheshwari
The outbreak of coronavirus
opens up an unanticipated and unmeasured downside risk, feels NISCHAL MAHESHWARI
, chief executive officer for institutional equities & advisory at Centrum Broking.
In the short to medium term, a defensive portfolio strategy is recommended, he tells Puneet Wadhwa
. Edited excerpts:
How are the markets likely to play out over the next three-six months?
The outbreak of coronavirus
has occurred at a time when the global and the domestic economies are facing a slowdown. The fear of supply-chain disruptions, likely to occur because of the industrial clampdown in certain Chinese provinces, has obstructed the nascent signs of global economic stabilisation displayed through the ceasefire in the trade war between the US and China, coupled with a few green shoots in India.
In the absence of any meaningful domestic triggers, the markets
are most likely to track virus-related developments across the globe. In this backdrop, they are likely to remain range-bound in the near term. The RBI can do a pre-emptive rate cut of around 25 basis point (bps) in the April policy, or even earlier. Other measures to improve transmission through another round of long-term repo operations (LTROs) cannot be ruled out.
Given the ongoing global risk sentiment, investors are flocking to safe-haven asset classes and avoiding risky emerging-market (EM) asset classes. However, if one needs to choose among EMs, India remains an attractive investment destination. Also, favourable policy initiatives, coupled with persistent efforts to garner more foreign capital to support the government’s growth objectives, have provided a significant boost to the Indian capital markets.
The Indian economy may enjoy the position of being less vulnerable to such shocks as India’s integration into global value chains is minimal, compared to its Asian peers. However, if the situation is not contained, India may be affected, too. Optimistically, for 2020, we expect foreign institutional investor (FII) inflows to continue gathering momentum as the better macroeconomic stability makes investments in India relatively attractive.
What's your view on the banking sector given the recent developments?
Given the challenges faced by corporates and non-banking financial companies (NBFCs) in the last 12-18 months, banks with high corporate exposure should be avoided. Investors should consider retail-focused banks. Domestic demand is likely to witness increased traction in the next few quarters, given pockets of rural economic activity gathering momentum, along with recent announcements on personal income tax cuts. This will drive credit growth in retail-focused banks.
Your estimates for corporate earnings growth in FY21?
Given the gradual pick-up in growth on account of measures adopted by the government and the RBI, we had estimated 22-23 per cent growth in Nifty earnings for FY21. However, the outbreak of coronavirus
in China has raised trepidations regarding disruptions in global industrial production and trade channels, thereby putting global growth at risk. If the epidemic is not contained in the near term, chances are that growth could further trend lower.
With the relative lower participate rate in global value chains, India may stay less vulnerable than other east Asian economies, but the spillover of a global slowdown is certain to have an impact. Investors are more likely to play defensive and sectors, such as information technology
(IT) and fast-moving consumer goods (FMCG), are likely to surprise amid risk-off sentiment.
Will the polarisation that we see in the markets now get entrenched over the next one year?
At this juncture, the market remains polarised with consumer durables, information technology
(IT), and banking providing the bulk of the returns. Since we do not expect a broad-based recovery in the FY21 as structural bottlenecks are likely to impede the path of normalised growth recovery, we expect the markets — that are being driven by only a few stocks — to remain polarised. Overall earnings are likely to see limited traction.
How do you see the consumption-related theme play out in the back-drop of sub-par economic growth?
The FMCG sector
should start seeing traction as it holds the key potential of acting as a contrarian play. Auto stocks have corrected significantly and we do not see elongation of coronavirus beyond spring. Expect things to normalise in the summer. Investors can look at the auto space – passenger vehicles
and two-wheelers – but should refrain from investing in commercial vehicles.
Your investment strategy amid all these developments?
Though the worst seems to be behind us, it is going to be a slow path towards normalisation. Given the current government has a political mandate and acknowledged the slowdown, it will continuously intervene to bring the economy back on track. In this background, investors should reduce cash gradually and look for value investing. However, the outbreak of coronavirus opens up an unanticipated and unmeasured downside risk. In the short to medium term, since the coronavirus scare will hamper growth world over, a defensive portfolio strategy is recommended.