BJP win in Gujarat positive but euphoria might be short-lived: Chhaochharia

Interview with Gautam Chhaochharia, Head of India Research, UBS Securities

Exit polls for the recently held elections in Gujarat and Himachal Pradesh have predicted a victory for the Narendra Modi–led Bharatiya Janata Party (BJP) in both states. GAUTAM CHHAOCHHARIA, head of India research at UBS Securities, tells Puneet Wadhwa the markets’ focus will be back on corporate earnings, reforms and global events. Edited excerpts:

How are you interpreting the exit polls and what are its likely implications?

We were already expecting the BJP to win. That said, there were some worries over the past couple of weeks, given the opinion polls. That led to some investors selling off. The exit polls are clearly a positive in that context. If the actual result on Monday is in line with these, that’s what the markets would have presumed to happen anyway. The markets will react positively for a couple of days around these results and then move on to the other factors/drivers.

What will drive the markets over the next few months?

January earnings season, Union Budget and global events. That apart, markets will be watching other macroeconomic data, especially the inflation print that has been a negative surprise. Once the election outcome euphoria fades, these factors/drivers will take over.

What are your expectations from the government on policy in its remaining tenure, especially given the outcome of the recent assembly elections?

We are now close to the general election, scheduled for May 2019. I don’t think the government will go out and try to do the tougher reforms, as in labour or big-ticket privatisation, etc. They will try to push through privatisation of Air India and the like, to show intent. The government will continue focusing on public sector banks (PSBs), getting their recapitalisation back on track.

What specific details does the market want to hear on PSB recapitalisation?

The plan should be spelt out in January or it could even be earlier. The government was waiting for the elections in Himachal Pradesh and Gujarat to get over before approving anything and getting the final parts done. 

The first measure will be to announce the first instalment of the capital and who gets what. The second part should entail more reforms for specific SOBs. I don’t think the rally in the (shares of) banks has run its course. If the recap and non-performing loan (NPL) resolution cycles continue as scheduled, bank stocks have more headroom left.

How do you see the India story playing out as compared to emerging market (EMs) peers over the next year?

Our EM strategist is still overweight on India but our Asia-Pacific (APAC) strategist is neutral, reflecting India’s much richer valuations and the fact that a number of countries have done well in the EM pack. These EMs have seen a pick-up in earnings, while earnings momentum is still missing back home. The lack of earnings growth is the biggest hole in the ‘India story’. Though Indian equities should not underperform EMs over the next one year, outperforming looks a bit difficult at this stage. 

Over the past three or four years, what has helped Indian markets, beside the local flows, has been the broader reforms agenda. Going into the new year when elections are round the corner, there is no expectation of any such agenda. Growth in earnings will take centre-stage. Though we have not set any specific index targets for the next year yet, we do not expect a huge run-up in the frontline indices from here.

Do you expect foreign flows to return to India in a big way after the assembly election outcome?

Foreign institutional investors (FIIs) have been overweight India anyway. They, however, trimmed the stance a bit, given that other EMs started delivering on earnings. Whether the FII money comes to India will also depend on whether they get more money in general. Will they increase allocation to India is difficult to say at this stage. A lot will depend on how earnings play out.

Do you see a pick-up in corporate earnings in the remaining part of FY18 and FY19? 

FY18 is almost over but we still see cuts happening. Headline numbers will be better than what we saw in the past couple of years and are likely to touch double-digit in FY18. However, the earnings trajectory will also be dominated by banks that have been hit by higher provisioning. The provisioning, I feel, should come down next year, even as core economic activity remains subdued.

What are your overweight and underweight sectors?

We are overweight on information technology services, telecom and two-wheelers; underweight on industrials and cement. While we remain underweight on the infrastructure sector, we are overweight on property.

Will mid-and small-caps outperform in 2018 as well?

This is a tough call. I did not expect them to do so in 2017 as well. The rally in these two segments is driven more by local flows, the pace of which will depend on how the overall markets play out.