The recent selling by foreign institutional investors (FIIs) has been on account of rising crude prices, which could continue in the medium-term, tells B Gopkumar, Executive Director & CEO, at Reliance Securities in an interview to Aprajita Sharma. With the Bharat-22 ETF getting launched on Wednesday, Gopkumar advises retail investors to take a slice of it as the companies under the ETF hold a proven track record.
1) With earnings season in its last leg, what trend have you picked so far? Which sectors surprised or disappointed the most?
Performance in the September quarter by companies has been satisfactory as faster restocking at channel levels aided companies to do better. We understand over 60% companies in Nifty50 have succeeded to beat street’s estimates. It is a good sign for Indian equities that earnings momentum finally witnessed an uptick (though at moderate pace). Sustainability of earnings momentum is key to equity market returns. Probability of higher growth is reasonable given low base after the impact of demonetisation during the last fiscal year.
Overall, FMCGs (baring ITC), midcap ITs and cement have surprised positively due to faster restocking and better realisations for FMCG and cement companies. Vertical specific advantages led mid cap IT stocks to perform ahead of estimates. Moreover, improvement in asset quality of public sector banks surprised the Street. However, corporate banking focused private banks and pharma continued to disappoint.
2) In the backdrop of rising oil prices and govt expecting a Rs 20,000 crore hit on revenues on account of GST, how much fiscal slippage do you expect in FY18? Will it be a concern for markets?
A back of the envelope calculation suggests that Rs 20,000 crore hit on revenues due to GST relaxation can impact India’s fiscal deficit to the extent of 10-12 bps. Notably, India imports over 80% of its total fuel requirements. Hence, rising oil prices cannot be good for a country like India as every dollar increase in oil price can soar India’s expenditures by $1-1.5 billion. Market is concerned about it and FIIs selling pressure in the last few sessions can be accounted to surge in oil price.
3) The market appeared to have remained decoupled from the tepid macro data of a last couple of quarters, riding on sheer liquidity. Does it worry you?
Tepid macro data were primarily on account of back-to-back reforms made by government in the form of GST, demonetisation, etc. We understand big reforms always come with big hiccups or teething troubles and eventually get stabilised. Market is probably realising the same and expects earnings to revive. Further, channelisation of savings from physical investment to financial investment has been a big helping factor for domestic markets
despite selling from FIIs, which we expect to continue in the medium term.
4) Indian economy is vulnerable to rising oil prices that have risen over 33 per cent since June lows. Can it emerge as a major threat to domestic stocks?
A sustained increase in oil prices can adversely impact India’s growth arithmetic as higher oil prices result in higher current account deficit for a country like India. Higher oil prices will stimulate CPI further and we may witness reversal of rate cut cycle, which may delay the revival of private capex and earnings recovery.
5) With recent spurt in shares of public sector banks, can we still find value in PSB stocks? Would you prefer private banks over PSBs even as the likes of ICICI Bank and YES Bank failed to live up to the mark?
Public sector banks slippages have recovered a bit during this quarter and government is also unveiling its recapitalization programme. Both the factors have had positive impact on the stock prices of PSBs. However, sustenance of stock returns from PSBs will be a lot more dependent on profitable growth path, which looks a tad more difficult given the competitive landscape which is emanating from private banks and NBFCs. Therefore, over the longer term well-run private banks and NBFCs are still better placed to reward shareholders better.
6) The government will launch the Bharat-22 ETF on November 15. Would it make sense for retail investors to take a slice of it?
Bharat-22 ETF makes sense for retail investors to participate as this is different from normal IPO. Companies under this ETF are well-recognised companies with proven track records, which have made money for their shareholders.
7) There is a lot of talks of tax cuts in US. With data prints in US suggesting an improvement in the world's largest economy, do you think that markets globally, especially Indian markets are well-positioned to see Fed tightening going ahead?
It is heartening that US exceeded growth expectation and grew 3% in Q3FY18. Growth of US economy has always been good for many Indian companies as India is a prominent trade partner for USA. Indian market has already factored in likely Fed hike in December 2017. A persistent shrinkage of real interest differentials is not good for India as; a) it makes unviable for any rate cut in India, and, b) it results in flight of easy money putting pressure on currency.