Institutional investors expect earnings to normalise in FY19: Jigar Shah

The market is getting expensive but isn't in a bubble phase, says Jigar Shah

With the benchmark indices in India trading at all-time highs, JIGAR SHAH, chief executive officer, Maybank Kim Eng Securities, feels rising global rates, protectionist measures, Brexit-type events and China’s next economic strategy are some of the risks the markets now face. On the domestic front, the biggest challenge is to increase investment and job growth and resurrect the banking system, he tells Puneet Wadhwa. Edited excerpts:

What do you make of the run-up in markets this year, without a meaningful recovery in earnings? 

The market is getting expensive but isn’t in a bubble phase. There is a healthy sector rotation taking place and the movement is in a range. Given a big change in terms of GST (Goods and Services Tax) implementation, there will be some transition phase in corporate earnings this year and quarterly volatility is inevitable. However, most institutional investors are looking at earnings to normalise in FY19. 

What are the key risks, global and domestic, to the rally in stock markets now?

The global risk is in the form of rising rates, protectionist measures, Brexit type of events and China’s next economic strategy. At home, the biggest challenge is to increase investment and job growth, and resurrect the banking system.

Are markets factoring in the likely disruption to the economy and corporate earnings from GST? 

Other than procedural changes and some adjustment time required for that, there isn’t a major disruption, on the face of it. This is because the GST Council took a safe approach of keeping multiple rates, making the exercise revenue neutral and anti-inflation. FY19 will be the year to watch in terms of impact on tax receipts and corporate earnings. 

Should investors look at domestic economy related themes or export-related companies? 

We find a few themes attractive. These are: private banks and financial services taking shares from state owned banks, renewables versus conventional power, build-operate-transfer (BOT) road projects, data and telecom infrastructure services, four-wheelers versus two-wheelers, software focused on big data/mobility/cloud and healthcare. We prefer bottom-up stock picking within the above themes. We are not necessarily bearish on export themes but look for certainty of earnings versus pure hope.

Will 2017 be the one of mid-caps and small-caps? In which sectors in the mid-cap basket do you find valuation comfort at this stage? 

Mid-caps are here to stay but with some volatility. The volatility is caused by some sudden earnings, governance or policy disruptions. This space will remain in demand because of its sheer ability to provide outsized returns versus risk. For example, in the past two-three years, stocks such as Dalmia Bharat, Capital First, Vakrangee and RBL Bank have been multi-baggers. Bajaj Finance and Eicher have graduated to large-cap from small-cap, in a time frame of five years. 

What sectors are you overweight and underweight on? Any contrarian bets?

We continue to focus on themes with sustainability in growth and sometimes also take a contrarian view. We are overweight on automobiles, private banks, renewables, power transmission, telecom infrastructure, four-wheelers and specialised software. In the near term, we are underweight on cement, state-owned banks and mobile telecom services. 

What about banks, automobiles and fast moving consumer goods sectors, given the rally seen thus far in CY17? 

We remain positive and see a lot of opportunities in private banks and financial services, four-wheelers and select consumer companies (beverage retailers). 

Can the mounting debt problem in power, telecom and infra dent the India growth story over the next few quarters? Should investors stay away?

Yes, these sectors are still not out of their problems and need time and doses of capital. It is better to wait for clarity to emerge before investing.