Rising probability of global risk-off biggest threat to markets: Khemani

Rising oil prices have kept markets nervous over the past few sessions. Vikas Khemani, president and chief executive officer at Edelweiss Securities, tells Puneet Wadhwa that despite the risks, he remains bullish on India’s prospects of being the story of the decade and the opportunity it offers to create significant wealth. Edited excerpts:

Earlier this year, you were expecting 10 – 15 per cent return from the markets in CY2018. Is there any change to the estimates?

I have maintained that 2018 will be a year of micro improvements and macro risks. This is playing out now. The pain on account of numerous structural reforms undertaken over the past years like goods and services tax (GST) and the RERA (Real Estate Regulatory Authority) is behind us, and we are now seeing a broad-based recovery. I am still bullish on India’s prospects of being the story of the decade and the opportunity it offers to create significant wealth, despite all challenges and risks.

How insulated is India from these risks?

A rising probability of global risk-off is the biggest threat to the markets that could get triggered from any of the factors like trade war, US Federal Reserve tightening or the European situation. Markets get jittery whenever these signs develop. The US dollar getting stronger also has huge implications for the already leveraged emerging markets (EMs), including India, in terms of cost of capital as well as its availability. On the domestic front, given that 2018 is a precursor to the election year, the political equations and assembly election outcome scheduled all through the year could keep markets jittery.

The weights of India and Brazil markets could be capped on MSCI indices. What are the implications for our markets?

MSCI currently has an exposure of $35-38 billion to the Indian markets via the MSCI Emerging Market Index. Application of capping factor to India will surely dent the flows that track India via this route. On one side, China-A share inclusion in the EM basket will gradually take China’s weight in MSCI EM higher, and on the other, the use of capping factor on India will further reduce its weight in the EM basket. It will be unfair on part of MSCI to adopt this approach for such a large and growing market like India. That apart, if such capping factor is introduced, then MSCI EM index will be highly dominated by China and will not reflect the true picture of emerging markets.

Your key takeaways from the March 2018 quarter earnings?

The March 2018 quarter results have been good and indicate a demand recovery in the economy. With a mid-teens year-on-year growth in profit after tax in commodities; fast moving consumer goods (FMCG), auto companies, retail lending banks and non-bank finance companies (NBFCs) posting good results, it is safe to say there was a broad-based recovery. Margins seem to be getting better in the information technology (IT) sector. In the consumer durables space, however, the demand remains muted and an increase in input prices is putting pressure on margins.

What are you sector preferences from a year’s perspective?

We are quite positive on IT, banking, financial services and insurance (BFSI), infrastructure and consumption related plays. Also, we are quite positive on private capex. I think this is one overlooked theme in the markets. Green-shoots are finally visible after a long hiatus of over half a decade, and hence this is one sector investors should watch out for. Most corporates across sectors have started equipping for growth as their capacity utilisation is rising. Power and utilities is another sector that is broadly neglected by the market, but I feel this too could be a good contra bet.

Has the outcome of the recent elections in Karnataka and by-polls made investors cautious on the possibility of a hung mandate in 2019?
 

It is premature to comment on the general election outcome, and one state’s outcome does not constitute a trend. Further, the market recovery, post results, has clearly indicated that it has been treated as a one-off event. That said, the markets will remain volatile, as is usually seen in the run-up to any major election.

What’s your outlook for interest rates over the next few months and strategy for rate sensitive sectors -- automobile, banks and real estate -- in this backdrop?

I do believe that the Reserve Bank of India (RBI) will be slightly hawkish this time around, given slight inflationary pressures that the oil price rise is putting. As highlighted earlier, globally, central banks are raising interest rates. EMs will have to follow suit to prevent outflows and a depreciative bias of their currency. To that tune, rate-sensitive sectors could experience bouts of volatility.