Recent geopolitical events have kept a check on the runaway market
rally seen thus far in calendar year 2017 (CY17). Abhay Laijawala, managing director and head of research, Deutsche Equities
India, tells Puneet Wadhwa
that his December 2017 target for the S&P BSE Sensex
is 29,000. Purely from a returns perspective, he expects mid-caps to fare better than large-caps. Edited excerpts:
How big a threat is the developing geopolitical situation in North Korea to the stability of global financial markets?
It is a risk that is of low probability, but also one that can’t be overlooked. Consequently, we see equity markets
reacting negatively when the war of words intensifies, and then react again once the threat seems to have blown over. We may, unfortunately, see this trend continue, given the significance of the event. Risk assets
will sell off and safe havens will move up, as and when the situation appears to be intensifying. Over the past few years, handling geopolitical issues has been encouraging though. We hope that an amicable consensus is arrived at soon.
Is it a good time to buy?
If the market
decline is significant, one should buy on dips. In the near-term, the risk-reward is unfavourable for Indian equities.
is facing headwinds from accelerated cuts in earnings
estimates, elevated valuations, and huge issuance pipeline ahead. Monetary policy normalisations in developed economies are also a risk.
What is the outlook for foreign flows into India?
Foreign institutional investors (FII) were sellers of equities
across key emerging markets
in August. In India, the amount was relatively higher (around $2 billion). Besides the general risk aversion, India-specific concerns were disappointing quarterly earnings, Doklam standoff, and elevated valuations. While India’s macroeconomic fundamentals stay robust, aggregate demand has been weak and earnings
growth lacklustre. The recent quarter saw actual earnings
come in below expectations, as well. Coupled with the elevated valuations, we see a high possibility that the threshold of investor patience may be getting stretched. We expect FII inflows
to turn volatile until there is clarity on geopolitical risks, tightening global liquidity
and a resumption in earnings
growth. Any macro data-point suggesting that the visibility of earnings
growth resumption is improving can emerge as a very strong catalyst for Indian markets.
What are the key risks to global financial markets from here on?
Key risks to global financial markets
include normalisation of developed economies’ monetary policy, especially the US Federal Reserve
(US Fed) and the European Central Bank
(ECB); geopolitical situation; commodity prices and Chinese growth momentum. Sustainability of the Chinese government’s policy stimuli next year would be interesting as this would have broader ramifications on commodity prices and global growth outlook.
Should one be focusing on the large-cap segment or the mid-and small-cap basket over the next one year?
While the risk-reward appears favourable for large-caps as compared to the mid-caps, a recovering growth and improving risk appetite environment generally bodes well for stocks in the mid-caps basket. Only from a return perspective, we’d expect mid-caps to yield better returns. Also the composition of index is such that defensive sectors like IT Services
have higher weights in large-cap indices versus mid-caps.
What are your CY17 and March 2018-end targets for the Sensex/Nifty?
Our December 2017 S&P BSE Sensex
target is 29,000. We expect cyclicals to lead the next leg of market
rally. Our preferred sectors are consumer discretionary, private banks, energy (of which a large segment of our preference is oil marketing companies), materials and industrials. Contrarian play – IT Services.
We prefer sectors with earnings
visibility or scope of earnings
revival. Within the manufacturing
space, we like auto, cement, oil refineries and select capital goods companies.
What are your estimates for FY18 and FY19 earnings?
We expect Sensex/Nifty earnings
growth of 16 per cent for the current fiscal year and 21 per cent over the next fiscal year. The GST implementation
has been largely non-disruptive and should help higher growth and earnings
momentum the next fiscal year.