Our 2016 year-end Sensex target is 30,000: Saumil Shah

Interview with MD & head of equity sales trading, Bank of America Merrill Lynch

There will be a sell-off in the emerging market around the first rate hike by the US Federal Reserve, however, as the dust settles India's growth tag will help draw investors, says Saumil Shah, managing director and head of equity sales trading, Bank of America Merrill Lynch. In an interview with Samie Modak, Shah says earnings recovery and a passage of the much-awaited Goods and Services Tax (GST) Bill could lead the market higher. Edited excerpts:

After gaining 30 per cent in 2014, the market is down at around seven per cent this year. What has caused this weakness?

The weakness in the market was led by a slowdown in the global economy, uncertainty about China and fears of a US Fed rate hike. A delayed domestic recovery has added to the woes that has led to earnings downgrades in India.

What are the near-term headwinds for the Indian market? And by when will they be resolved?

The near-term headwinds are - the possibility of a US Fed rate hike and a slower-than-expected recovery in the economy. Any risk of further depreciation in the Yuan could also lead to weakness in currency and markets.

What will be the impact of the US Fed rate hike on the market?

We expect markets to sell-off emerging markets (EMs) around the first Fed hike. As the dust settles, India should attract investor interest. As a relative value, India has that scarce commodity investors seek-growth. As business confidence returns to the US, there should be a rotation to equities from bonds and commodities.

The entire EM pack hasn't performed well this year. Do you expect reversal in fortunes for the EM?

A big part of the EM pack is commodity exports. Given the benign commodity prices, fortunes of these countries are not expected to revive. Similarly, China will continue to see deceleration in growth as it rebalances its economy towards consumption. India on the other hand will likely continue with the status of 'growth haven' among the EMs. This is largely due to the structural reasons as well as recent improvement in the macro and commodity price corrections. Given the lower oil prices, India's current account deficit stands to benefit and RBI's policy to build forex reserves has been positive for the rupee, which continues to be a relatively stronger currency.

What are the positive triggers for the market for the next year?

Further lending rate cuts, a modest earnings recovery and a passage of the much-awaited goods and services tax (GST) Bill could lead the market higher.

What is your take on the reform process?

There is a window of about 12 months (until the end of 2016) that the ruling government could use to pursue legislations in the parliament, without worrying about the impact on voters in some parts of the country. We rank the passage of the GST Bill in the Parliament as high-impact reform on government's agenda simply because this is seen as a test of its ability to deliver on 'reforms'. However, apart from the GST, the government is not expected to chase "headline grabbing" reforms but rather do many smaller reforms - like the Waterways Bill, Real Estate Bill, State Electricity boards' operational restructuring among others.

What kind of returns do you expect next year?

Our 2016 year-end Sensex target is 30,000, implying around 15 per cent returns from the current levels.

What are your sector preferences?

We prefer urban consumption and rural investment plays. The sectors for these would be consumer discretionary sectors, cement, and banks.