Retail investors are still wary of the markets: Edelweiss' Vinay Khattar

There has been an earnings recession for the past 4-5 years in the market causing a downward bias for the future, Khattar says.

Even though key economic indicators suggest slow growth at present, VINAY KHATTAR, Head, Edelweiss Professional Investor Research, tells Chirinjibi Thapa that some early signs of a probable economic growth revival have already sprouted. Edited excerpts:

How do you see the markets playing out in the rest of the current financial year? What are the biggest near-term risks?

We are currently bullish on the markets for two reasons. First, easier monetary policy will act as a catalyst in improving nominal growth. Second, we expect earnings revival to take place, primarily driven by public sector banks. PSU Banks could turn profitable after four years of benign profits. This itself could add 165 per cent earnings growth in NSE-500 PSBs. The biggest near term risks are skeletons in the closets of the NBFCs and banking space, and risks of escalated global trade tensions.

What’s your view on the key economic indicators? Is the current slowdown here to stay?

It is true that some of the leading economic indicators like two-wheeler sales, deposits growth and eight core industries data are all showing slow growth or a contraction. However, we have seen some very early green shoots in capacity utilization, lower corporate spreads, reduction in g-sec yields, liquidity. Also, there have been signs of improvement in monetary transmission. Of the 50 basis points (bps) cut in policy repo rate, 21 bps have already transmitted into weighted average lending rate. We believe we are currently at the cusp of economic growth revival.

Your earnings estimates for FY20? Which sectors can surprise positively? How far away are we from a meaningful revival in capex?

For FY20, we expect Nifty diluted earnings per share (EPS) at Rs 669. Automobiles and mid-cap financials seem attractive currently and may surprise on the upside as their valuations have started to bottom out. A recovery in credit growth and ease in borrowing costs coupled with increasing capacity utilizations should spur a revival in private capex going ahead, and we think this should start to materialize in another two quarters.

How are retail investors looking at the developments? Do they still prefer to be on the sidelines, fearing the contagion will spread?

Retail investors are still wary of markets as earnings growth have not met the expectations. They continue to be in the wait-and-watch mode for now.

Why hasn't the supposed revival in broader market arrived yet? Given the year-to-date (YTD) performance, should one stay away from the mid, and small-caps?

There has been an earnings recession for the past 4-5 years in the market causing a downward bias for the future. Lack of meaningful earnings growth has led to confidence crisis. The broader markets, especially in the midcap index, is trading at nearly 16 times its 1 year forward earnings. This is significantly lower than its average of the last 5 years which is at 20 times. From valuation perspective, we believe it is good time to pick quality midcap and small cap stocks.

What are the measures needed to fix farm and rural sector distress?

Low real rural wages have been a big problem. Maximum selling price (MSP) price hikes and rural spending have failed to translate into wage growth. Focusing on revival on nominal growth will help fix farm and rural sector.

Expectations from the upcoming Budget in July? Will the government dilute fiscal prudence for economic revival?

We do not expect big-bang changes in the upcoming budget. It would be more or less in line with the previous budget. The government, through extra budgetary resources, has already widened its fiscal support and we expect this to continue.