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Risk-reward is unfavourable for equities in the near term: Abhay Laijawala

Expecting Sensex/Nifty earnings growth of 16% for current fiscal year & 21% over the next: Abhay

Puneet Wadhwa 

Deutsche Equities MD
Abhay Laijawala, MD & head of research, Deutsche Equities India

Recent geopolitical events have kept a check on the runaway rally seen thus far in calendar year 2017 (CY17). Abhay Laijawala, managing director and head of research, India, tells Puneet Wadhwa that his December 2017 target for the 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

It is a risk that is of low probability, but also one that can’t be overlooked. Consequently, we see equity 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 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 decline is significant, one should buy on dips. In the near-term, the risk-reward is unfavourable for Indian The is facing headwinds from accelerated cuts in 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 across key emerging 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 growth lacklustre. The recent quarter saw actual 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 to turn volatile until there is clarity on geopolitical risks, tightening global and a resumption in growth. Any macro data-point suggesting that the visibility of growth resumption is improving can emerge as a very strong catalyst for

What are the key risks to global financial from here on?

Key risks to global financial include normalisation of developed economies’ monetary policy, especially the (US Fed) and the (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 have higher weights in large-cap indices versus mid-caps.

What are your CY17 and March 2018-end targets for the Sensex/

Our December 2017 target is 29,000. We expect cyclicals to lead the next leg of 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 – We prefer sectors with visibility or scope of revival. Within the space, we like auto, cement, oil refineries and select capital goods companies.

What are your estimates for FY18 and FY19

We expect Sensex/growth of 16 per cent for the current fiscal year and 21 per cent over the next fiscal year. The has been largely non-disruptive and should help higher growth and momentum the next fiscal year.

First Published: Mon, September 04 2017. 23:28 IST