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What are the likely triggers for the markets from here on?
I believe crude oil is the joker in the pack. If crude oil goes up significantly, we’ll be in trouble as we import 80% of our oil needs. The rupee took a beating even while crude was hovering around $40 a barrel. With oil imports getting costlier, the rupee will depreciate more at a time when dollar is also getting stronger. Geopolitical triggers will also be important. On the domestic front, inflation, GST and revival of the capex cycle will be important factors.
Should India be worried about the so called 'Trump tantrum'?
We should worry about information technology (IT) and pharma, though I think both issues will get resolved once it is clear that the steps proposed will hurt United States and its people. But in the medium-term, Donald Trump’s geostrategic agenda will favour us. He doesn’t like China’s huge trade surplus, so higher duties on Chinese imports can be expected. If that happens, some manufacturing will shift to India.
Secondly, he is unlikely to back Pakistan financially which means less border trouble. This, in turn, can help India reduce its defence spend. Thirdly, Trump is likely to follow a hands-off policy abroad. So once China gets assertive here, the countries here will look to align with other big power in this region i.e. India. In the best case scenario, the outcome will be a free trade agreement with this set of South East Asian countries, which could become a big market for us. If we see any signs of all this, markets will respond swiftly.
What is your take on foreign inflows to India as the US Federal Reserve (US Fed) moves towards monetary tightening?
When the US Fed first raised rates in November 2016, we did see money exiting our markets and moving back to the US. In any case, this was not a surprise and has been on the cards for a while. It also coincided with demonetization. I think that part is mostly done and ultimately money will chase growth and returns. India is well placed for that. I see FY18 seeing significant FII inflows. The only hiccup will be when Fed rates are increased again, but that too will be temporary. I see Nifty at 10,000 by end of December.
Back home, will state elections, especially the outcome of UP polls, be a big trigger for the market?
The state assembly elections will not have a long- lasting impact on markets. Talking about ongoing elections, even if the verdict goes against the ruling party, the downside will be protected because people will look at it as a local issue. On the other hand, the market will witness significant upside if the ruling party wins, because BJP’s strength in Rajya Sabha will get a boost with attendant implications.
Large-caps have been playing second fiddle to mid-and-smallcap indices. Do you see a trend reversal anytime soon?
Among emerging markets, countries like India and China have been growing at impressive rate for so long. In growing economies like these, the smallcap companies turn into midcaps and midcap companies become largecaps. This is the definition of growth. It has to be broader driven by new businesses and entrepreneurial spirit. From an investment perspective, large-caps are considered safer bets with good but lesser returns than successful midcaps and smallcaps.
Do you believe that the buyback by TCS, if approved, will bring investor confidence back in the IT names?
A buyback proposal signifies that the company believes that its shares are undervalued. It is a definite sign of confidence from the management and will benefit the shareholders if approved. But it can never replace performance, and markets finally track that.
There has been a board-room war in reputed firms such as Infosys and Tata Group companies? How does it impact the sentiment?
Sometimes these skirmishes are good because it forces the companies to reassess their actions and strategies. But if such issues extend for long, the employees and clients get cautious as it takes management’s eyes off the core business. As an investor, you should put a date since the controversy started. If it continues to headline for over 30 days or so, one can dump the stock to look for other safer bets, after all, there are over 5,000 companies to invest in the stock market. The best case is when these issues are raised, get addressed and are out of way because of good governance. All these storied stocks with long history take time to go down because their fundamental strength is there all the time.
Which pockets/themes one should look at investing this year?
In my view, private banks and NBFCs will perform well for an extended period of the time, so long as we maintain GDP growth above 6% because you need capital to fund this growth. Analyse the internal mechanics of the companies you pick from these sectors. Also, the Auto sector is expected to do well, given our demography of being an upwardly mobile nation. People will tend to buy more as long as growth remains intact. Realty will be the last to pick up, but will become favourites of the market in 18-month to two-year from now. I would advise to avoid IT and pharma purely as a tactical move till the uncertainty over Trump’s policies gets resolved.
How much earnings growth for Nifty50 do you expect in FY17 and FY18?
We estimate that the Nifty50 companies will report 7-8% growth in FY17 and I expect it to be double of that in FY18. The next FY will be a watershed year for stock markets with double digit percentage growth.
RBI has now suggested that interest rate cut is unlikely anytime soon. How should one play rate-sensitive stocks in this backdrop?
Our country which is growing fast cannot maintain low rates for long because we need capital expansion to fuel the growth. And I believe inflation fears will always be there. This time, not many people were surprised after RBI did not go for a rate cut. The only surprise was that they changed their stance to neutral from accommodative. There will be less cash in the system as they move towards sucking liquidity from the markets. How and when they do that is what markets will track for next several weeks.
The December quarter earnings suggest the demonetisation fears were unwarranted. What are your views, given we are still in the midst of the season? Can we expect the cash ban to weigh in on Q4 numbers as well?
The impact of demonetisation has been significant as we observed in the Q3 earnings of FMCG companies. Although the pain will spillover in Q4, I believe the market has factored that in. This is why Nifty is up 6% year-to-date. Other factors are now becoming more dominant in pricing stocks.
Where do you see oil prices headed in 2017?
Crude prices started soaring after OPEC’s deal with non-OPEC oil-exporting countries to cut production. The prices will crash again if the alliance does not hold. On top of it, it is difficult to track if indeed the countries are actually reducing production levels consistently. Secondly, the alliance is not a natural one. Some of these countries are opposed ideologically and even have ongoing proxy wars in Syria etc. They have their internal compulsions too. So it is hard to forecast but it could hit $70 if the alliance holds or crash to $40 if it doesn’t.