Political stability is a key factor for FII inflows: Nischal Maheshwari

Nischal Maheshwari, CEO for institutional equities & advisory at Centrum Broking, tells Business Standard that the larger issue at hand is earnings growth and not the election outcome

Investors are keenly watching political developments with the general election reaching the halfway mark. Nischal Maheshwari, chief executive officer for institutional equities & advisory at Centrum Broking, tells Puneet Wadhwa that the larger issue at hand is earnings growth and not the election outcome. Edited excerpts:

What is your market outlook for the rest of the year?

The market performance in the next few months will largely narrow down to two events — the outcome of the general elections and the March 2019 quarter results of India Inc. Any untoward disruption in the election outcome may result in a sharp decline for the indices, albeit temporarily for about four-six months. Post this, the indices will stabilise as new initiatives and regulations will be announced by the government.

However, the larger issue on hand is the growth in earnings. Recently, the markets have rallied significantly and valuations are high. Hence, it is pertinent that growth in earnings should justify this sharp rally, else we may face headwinds. Investors looking to enter at current levels should focus on wealth creation from a long-term perspective and be prepared for momentary market dips.

Where do you see opportunities in the current market?

Investors should remain stock-specific and not sector-specific. We advise investors to stay away from companies that have high debt and high promoter share pledges. Banking stocks look fairly attractive. Recent initiatives such as the asset quality clean up, increased provisions for non-performing assets (NPAs) and corporate governance issues for select banks have been addressed.  The stocks had bottomed out and we can expect an upward trajectory from here on.

Non-banking financial companies (NBFCs), too, should see momentum owing to the liquidity tightening cooling off substantially. On the other hand, consumption-driven sectors of auto, consumer durables, etc may see muted growth due to the recent slowdown in demand and high inventory levels.

How are foreign investors viewing the developments in India?

In the last two-three months, foreign institutional investors (FIIs) have invested heavily in the emerging markets largely due to the US Fed taking a dovish stance. India, too, was a beneficiary of this and received nearly $9 billion in inflow. A number of EMs such as South Africa, Thailand and Indonesia are in election mode and will elect a new government by the end of 2019. Political stability is a key factor for FII inflows. Continued FII investments in India, too, will largely depend on the outcome of the general election. If we see a stable government taking charge at the Centre, the inflows will further increase.

What are your expectations from the March 2019 quarter earnings?

March 2019 will see marginal growth at an overall industry level. From a sector perspective, we expect the banking sector to perform well, owing to the recent asset clean-up drive. The information technology (IT) sector has delivered satisfactory results in spite of the rupee falling to 68 – 69 levels. Analysts expect the rupee to bounce back to Rs 70 levels owing to increased crude oil prices, which will be a positive for the IT and the pharma sectors.

Consumption-driven sectors will see muted earnings growth due to the recent slowdown in demand. After the election, we expect demand to pick up significantly and the India Metrological Department predicting a stable monsoon will augur well for these sectors. We will watch the auto sector closely, as crude oil prices have started rising again, which may impact growth.  

What's your view on the recent developments in the aviation sector?

Aviation is a complicated sector across the globe. Very few players have emerged successful. Given the recent turn of events, IndiGo and SpiceJet can be looked at from a tactical trade point of view, as they will be able to fill up most of the slots vacated by Jet Airways. However, from a long-term wealth creation perspective, we would advise caution. Though there is an increase in passenger growth, there are multiple external factors such as oil prices, exchange rate volatility and weather disruptions causing delays that can impact operations. Investors can explore other lucrative and more stable sectors for investment, and limit their exposure to aviation.

Should one increase allocation to defensives?

IT definitely looks positive as we expect the rupee to weaken to Rs 70 levels owing to an increase in crude oil prices. Moreover, IT companies have also been announcing special dividends and select buyback offers, which show a sign of strong growth. Pharmaceuticals, too, stands to gain from the rupee weakening, but regular checks by the US Food and Drug Administration will always keep a cap on the price. We are positive on the consumer staples sector and believe that increased demand from rural areas will drive growth in this space.