The market won't wait for earnings to recover, says Jitendra Gohil

Our house remains neutral on equities as an asset class, but believes equities may remain well supported, as global bond market yields are unattractive, he said

After a sharp rally since March lows, Jitendra Gohil, head of India equity research, Credit Suisse Wealth Management, tells Puneet Wadhwa his house remains neutral on equities as an asset class, but believes they may remain well supported as global bond market yields are unattractive. Edited excerpts

What’s your outlook for the markets after the sharp rally since March lows?

Without any material fiscal support, it will be tough for the economy to reach pre-Covid-19 levels anytime soon. It is natural to see macro improvement on a sequential basis after the kind of sharp dip we saw in April due to the lockdown. On the other hand, the markets do not depend on the economy alone; there are several other factors. The market will not wait until earnings recover. Also, the frontline indices are largely focused on stocks that are least impacted by ground reality in India. Given the earnings surprises, led by cost-cutting and the unprecedented support from global central banks, confidence is back in the equity markets. Our house remains neutral on equities as an asset class, but believes equities may remain well supported, as global bond market yields are unattractive.

How lucrative is the fixed income segment after the RBI policy?

Fixed-income investors are a bit nervous after the recent Reserve Bank of India (RBI) monetary policy, where there was no clarity in terms of intervention to absorb the massive deficit-funding requirement by the government. Inflation, too, is expected to remain above or close to 6 per cent in the next couple of months before normalisation. Nevertheless, global central banks will keep interest rates lower for longer and given the sufficient forex reserve with the RBI, there is some comfort for foreign investors. The key is to keep the rupee stable to attract more foreign capital. Certainly, domestic savings are not sufficient to fund this massive amount of deficit funding, and hence the government and the RBI will have to come out with an innovative way to fund this deficit.

What’s your sector preference at the current levels?

Several sectors have not participated enough in this rally and can do well in the future. For example, larger private sector banks have already raised significant capital, which gives us more confidence in their prospects. We recommend an overweight allocation towards large private banks from a 12-18-month horizon. For multiplexes, earnings may come back to pre-Covid-19 levels in three years and there is a high probability that these stocks could go back to their previous peaks in three years, providing solid return potential. Telecom is a structural story in India; data consumption in India is the highest while the data price is the lowest in the world. We are positive on the telecom sector, though there could be some consolidation as stocks seem overbought.

Should one invest in mid- and small-caps as a contra play?

 The recent rally in the mid-cap space has pushed the valuation higher. Currently, the Nifty Midcap 100 trades at a 5 per cent premium to the Nifty. Thus, from a valuation perspective mid-caps are not cheap. Interestingly, we have seen greater participation of retail investors in the markets after the Covid-19 outbreak. A continuation of this trend will keep interest high for mid-cap stocks. However, investors need to be extremely selective. We have been recommending mid-caps in the pharma and the chemicals space, and continue to recommend stocks in these sectors. The contract manufacturing sector has recently come under limelight and investors should be careful with valuations before buying with select companies across pharma, crop protection and manufacturing.

What is your reading of the management commentary of India Inc after the June quarter numbers?

The expectation was already low and corporate India has proactively cut costs, helping margins. Overall earnings have been much better than expectations. Highlights were the information technology (IT), pharma and cement sectors, where we have seen significant beat, and these sectors have better visibility on earnings. Our back-of-envelope calculation suggests the Nifty earnings per share (EPS) in FY22 could be around 600 levels lower than what consensus is projecting. This may change depending on any demand stimulus announcement and how fast we bring the virus under control.

How nervous are the markets over a slippage in the fiscal deficit by FY21 end?

The government and the RBI seem to be in a wait-and-watch mode, which may not be the best strategy. It seems the government is concerned about credit ratings. Rather than directly spending, it is trying to woo foreign and private investments to kick-start the investment cycle with the help of various policy tweaks and incentives. Given the Bihar polls later this year and the West Bengal elections in early 2021, there is a possibility we may see some urgency in higher spending by the government to support demand in the latter part of the year.