The market is expensive now and will continue to remain so: Naveen Kulkarni

While we expect a 25 basis point rate cut from the RBI's June 2019 policy meeting, we will be looking forward to the central bank's commentary on GDP for FY20, he said.

A decisive mandate for the Bharatiya Janata Party (BJP) has bolstered the investment sentiment in Indian markets, nudging them to buck the global trend of losses and scale record highs. NAVEEN KULKARNI, head of research at Reliance Securities tells Nikita Vashisht that despite high valuations indices are expected to inch higher over the next one year. Edited excerpts:

Do you think the markets are disappointed with Nirmala Sitharaman’s appointment as the Finance Minister? 
 

Finance is a very typical job where you have to deliver in terms of growth rate, jobs and gross domestic product (GDP) every quarter. It's a tough portfolio. But we know that Nirmala Sitharaman is a dedicated and a hardworking minister. She will be committed to long-term goals, which will be fiscal consolidation and the like.

Having touched record highs and consolidating thereafter, where do you see markets going from here on over the next six months?
 

Having won with a clear majority, the ruling party has paved the way for a stable government. Consequently, the continuity of policies formulated between 2014 and 2019 is expected. One can expect infrastructure creation and fiscal prudence from the new government.

A stable government is liked by markets. In this backdrop, it is safe to assume that the overall market volatility is likely to go down. However it is not going to a runaway market. We might see the markets going up, consolidating a bit and then charging back. While global volatility continues to pose as threat, stable domestic political environment is likely to act as a cushion against it. 

What are your expectations from the RBI’s June 6 monetary policy meeting in terms of rate cut decision and outlook? 
 

While we expect a 25 basis point rate cut from the Reserve Bank of India’s (RBI) June 2019 policy meeting, we will be looking forward to the RBI's commentary on the gross domestic product (GDP) for FY20. Given that the numbers for Q4FY19 and FY19 as a whole were weak, the forecast for FY20 will assume importance.

We are yet to have concrete answers as to how the global developments could affect domestic markets, thus the central bank’s vision holds importance. Even prices of crude oil are in a soft spot as of now, thus providing fiscal support.  

Which sectors are going to benefit in the near-term, now that elections and earnings are over? 
 

Banking, infrastructure, cement, and quality mid and small caps are expected to provide good returns to investors.  Among small-caps, we expect Sonata Software to do well among the information technology (IT) pack. Under the infrastructure we are betting on HG Infra and among cement stocks we likeJK Lakshmi and JK Cements. 

How comfortable are you with the overall valuation of the market?
 

The market is expensive as of now and will continue to remain so due to growing appetite for investment. It is trading at one standard deviation above its long term mean, which can be called expensive but not in an exuberant zone. FY20 looks a decent year where earnings’ growth should multiply, especially in the banking sector, to support the valuations.

When can we expect the corporate sector to see an earnings recovery?
 

While it’s difficult to say when will the entire corporate sector see a recovery. In FY20 we are expecting a 15-18 per cent growth in earnings.

The overall earnings estimate gets impacted by a few heavyweight stocks. On a broad-based basis, firms like HDFC have reported decent numbers. What dents the earnings, however, is a situation where a firm like Tata Motors reports a huge loss. At the end of the day, how these earnings will affect a person’s portfolio will depend on whether one has an allocation to these companies or not.

What is your outlook on mid/small caps? Do you see them outperforming the large caps over the next six-12 months?
 

We expect the small caps to outperform the large and mid-caps as they have been beaten much more than the others. Their valuations are much more attractive now than what they were. The valuation gap between the large cap and small cap is high right now, pointing towards the latter’s outperformance.  As said, with overall volatility decreasing in the next three to six months, we could see more small-caps and mid-caps do better.

Which sectors are you overweight or underweight on? Why?
 

We are overweight on banking, cement, infrastructure and IT. All these sectors have an improving earnings and stable macro picture. 

A mismatch between the valuation and earnings in the consumption sector makes us underweight on the sector along with Non-Banking Financial Companies (NBFCs) due to liquidity crunch.

What are your expectations from the new government in terms of fiscal stimulus? Do you see private investment picking up in the near future or will the government spending continue to write India’s growth story?
 

With government spending likely to continue, there could be a minor fiscal slippage in FY20. Given the rise in capacity utilization and revival of demand, we expect private investment to pick up over the next six to 12 months.

To cater to the rising demand in the long term, it is expected that firms will begin expanding over the next year. By 2023, we should see high capacity utilization coupled with increased prices. 

Indian equity markets have been more or less insulated from trade war concerns, how much do you think the developments will affect India?
 

There are multiple ways in which India might get impacted because of global developments. The iron ore or steel prices might change (because of a slowdown in China), while the closure of any border might affect trade negatively. These are the developments that one needs to keep a tab on. 

After a clear mandate for the government, how do you look at companies tapping the primary market for fundraising? Will the sentiment change for good?
 

Companies should definitely start tapping primary markets over the next one year. Valuations are reasonably high providing the opportune time to start raising funds. While each company could see varied investors’ interest, time is right to raise funds.