Market may be due for both price and time-wise corrections: Jigar Shah

The current rally has an implied assumption that interest rates will remain permanently negative and inflation 'pick up, but this is quite unlikely

The markets may have run up too fast, too soon, says JIGAR SHAH, chief executive officer, Maybank Kim Eng Securities. The brokerage's March 2021 target for the Nifty since the Covid-19 outbreak was 8,100, based on a price-to-earnings ratio (P/E ratio) of 14x two-year forward earnings. As things stand, Maybank is keeping this forecast unchanged, he tells Puneet Wadhwa in an interview. Edited excerpts:
 

Are the markets ripe for a correction?

The market may be due for both price and time-wise correction as, eventually, stock prices are the slaves of earnings. The Bloomberg consensus one-year forward P/E ratio for the Nifty is 27x and two-year forward P/E ratio is 19x, which means that the market is expecting a sharp rebound in earnings. Even though there is a strong rally globally in both developed markets (DM) and emerging markets (EM), the breadth is not so good. If you take out the heavyweights from any market, the recovery may not look really good.

You have any index target?

The current rally has an implied assumption that interest rates will remain permanently negative and inflation ‘pick up. This is quite unlikely. We’ve seen a glimpse of this after the global financial crisis in 2008-09. Ultimately, inflation rises and leads to significant volatility; risk-on and risk-off trades  make emerging markets relatively volatile. This time the US polls, US Fed action, and the fight against pandemic has resulted in too much liquidity as a response. The negative real rates are causing most asset classes to rally. Our March 2021 target for the Nifty since the Covid-19 outbreak was 8,100 based on a P/E ratio of 14x two-year forward earnings. As of now, we are not changing this.

How are foreign investors looking at the emerging markets, especially India, as an investment destination?

After the initial sell-off in March/April, the foreign portfolio investor (FPI) investment in India has been gradually positive. In fact, FPIs have poured significant new investment into the capital-raising by Indian banks, telecom companies, pharma firms and others. They are long-term investors and see an opportunity when the markets are under pressure. In recent months, FPI flows into India are bigger than most other emerging markets which signifies that they like some of the Indian companies, irrespective of near-term pain in the economy and somewhat premium valuation.

A large part of the rally in the Indian markets at the index level has been led by Reliance Industries. Is this over-exuberance justified?

This phenomenon has been already seen in the American market with Apple, Amazon, Facebook, Microsoft, Netflix, Tesla, and Google (Alphabet) market cap dwarfing or overshadowing most others. Reliance Industries (RIL) is the only stock in India that has ingredients of both old and new economies, the ability to attract large capital and put it to productive use, proven execution capability, etc. Whether expectations are be justified will be tested by the performance. Since the launch of Reliance Jio in 2016, RIL has hardly taken a step wrong and proved its critics wrong. Albeit, it is important that it sells stake in the oil-to-chemical business to Saudi Aramco, reducing its overall risk.

Do you think pent-up demand in sectors like FMCG and auto is now coming to an end?

We continue to remain negative on the automobile sector, except tractor and motorcycle companies, which largely cater for rural areas where farm income is on the rise. The full recovery in passenger and commercial vehicles is at least three-four quarters away and stocks are trading at above-average valuation, not ready for any disappointment. FMCG companies should do well because consumer demand continues to be strong even as part of the economy is hit. Most essential consumer products are doing well in the rural markets, and Diwali will test demand in the urban markets. Government handouts and employment guarantee programmes also support the FMCG sector.

What’s your view on banks against the backdrop of moratorium debate?

State-owned banks will struggle without fresh fundraising and a quick decision to consolidate. Private sector banks should gain at the expense of these banks, especially the top five-six names. The best way to play the BFSI sector would be through the top private banks and a few NBFCs. State Bank of India (SBI), however, is an exception among the state-owned banks. Even within the private sector, small-and mid-sized banks either need to raise capital or consolidate.

What’s your investment strategy since March lows?

We have been cautious in our approach and expectations as we believe neither the market can continue to go up nor the economic recovery will be V-shaped. In fact, a K-shape recovery is emerging globally which is widening the income inequality further, making it harder for governments and businesses. Our preferred sectors are the telecom, private banks, software, cement, farm equipment, pharmaceuticals, and consumer sectors. A contra theme will be cinema exhibition companies.