'Lack of earnings growth, high valuation are biggest challenges for market'

In medium-term, trajectory of interest rate will depend on the trend of inflation, oil prices and global bond yield, says Satish Menon, executive director, Geojit Financial Services

The Reserve Bank of India (RBI) surprised the markets with a hike in repo rate. SATISH MENON, executive director, Geojit Financial Services tells Debashish Pachal that he has a one-year target of 10,400 for the Nifty50 index. Consumption related stocks should do well going ahead, he says. Edited excerpts:

How should investors play the interest rate sensitive stocks in the backdrop of RBI’s rate hike?

Market was hoping for a status quo with a hawkish view. In the short-term, we expect some respite in the bond and equity markets, which will be positive for rate sensitive stocks. In the medium-term, the trajectory of interest rate will depend on the trend of inflation, oil prices and global bond yield which is currently on the upside.

What are the key risks and triggers for the markets from here on?

We have a one-year target of 10,400 for the Nifty50 index. Tailwinds caused by prognosis of good monsoon and uptick in economic activity in Q4FY18 at 7.7 per cent GDP (gross domestic product) will boost market sentiment. However, lack of earnings growth coupled with premium valuation is the biggest challenge for the market. Rising interest cost is impacting arbitrage, while valuation is being downgraded due to lower-than-expected results. Volatility in oil prices and resultant impact on domestic macros like inflation, rupee are detrimental to India’s fiscal.

What are your key overweights and underweights at the current levels?

Consumption is the theme for the year. Start to monsoon has been good, market optimism will increase supporting the consumption-led story and rural economy. With government’s emphasis on agriculture and allied activities, and the positive effect of third consecutive normal monsoon is likely to augur well for the rural economy. We are very positive on staple, durable and discretionary segment. We are also constructive on chemicals, agro, information technology (IT) and pharma sectors from a long-term perspective. In the near-term we are underweight on financials, cement, energy, telecom and mid & small caps.

What is your opinion on PSU bank stocks?

Among 21 public sector banks (PSBs), Indian Bank and Vijaya Bank posted profits, while the rest reported net loss in FY18 to the tune of Rs 87,000 crore, mainly led by higher provisioning. Huge loss and increased NPA amount will wipe out the benefit of government’s ~Rs 65,000 crore capital infusion plan for FY19. This will trouble the PSBs in upholding the regulatory capital adequacy requirement and it is expected to continue the pain for another 12 to 18 months.

Is the worst over for the metal sector given the trade war concerns?

In the steel sector, 25 per cent tariff imposed by US on imports is unlikely to have a direct impact on the Indian steel manufactures as steel exports from India is only 2 per cent of the total trade exports from the country. However, imposition of tariffs will inevitably force major steel producing countries to divert a part of their exports to other steel consuming centres like India. Increasing the possibility of oversupply in rest of the world over the medium-term. This could distort the domestic market considerably by raising the threat of imports and could lead to falling steel prices in the future.

Are retail investors willing to deploy as aggressively in the markets as seen prior to the Karnataka election outcome?

We feel that flows of domestic institutions (DIIs) will continue given the trend of financialisation of assets in India. Well it is completely positive that we will have seasonal change in the strength of the inflow. However, volatility till year and factors like surge in oil prices, slowdown in credit growth and higher inflation can impact the flow of funds in the short-term. Additionally, anxiety as regards upcoming state election results, premium valuation, shift in funds from emerging markets (EM) to Developed Market (DM) may add some volatility in FIIs flows. That said, election results have only a short term impact on equity whereas macro fundamentals will keep India story positive.

What's your advice to investors in the retail markets as things stand?

We have been suggesting a cautious view to our retail investors since the start of the year. This is largely in anticipation of volatility due to premium valuation of Indian markets, shift in global funds and political risk. We had suggested to shift to large-caps, quality midcaps and consumption-oriented sectors. We continue to hold that view.