Unrealistic to expect any major boost from the Budget itself: Pratik Gupta

Although, said Gupta, various government initiatives may accelerate economic growth in next 1-2 months and hence change sentiment

As the markets await the government to spell out proposals in the upcoming Budget on Friday, PRATIK GUPTA, managing director and head of equities at Deutsche Bank India tells Puneet Wadhwa that given a likely US Federal Reserve (US Fed) rate cut cycle going forward, he expects inflows to emerging markets – including India – to pick up over the next six months. Edited excerpts:

What are your expectations from the Budget?

Given fiscal target constraints and the delay in transfer of any surplus from the Reserve Bank of India (RBI), it’s unrealistic to expect any major boost from the Budget itself. Headline indices are likely to remain range-bound in the near-term. However, looking outside of the Budget, over the next one – two months, we do expect various government initiatives to accelerate economic growth, which could help change sentiment and the long-term outlook and be a bigger driver for the market. Our Nifty50 target remains at 12,500 by December 2019.

How are you reading the economic data and its implications for the markets?

The market is already pricing in a near-term growth slowdown and low inflation with more rate cuts, along with a weak monsoon and Brent oil at $65-70 per barrel. So, a bad monsoon or oil at over $80 remains a risk. Growth is likely to pick up in the second half of financial year 2019 – 20 (H2FY20), which, along with lower interest rates, should help support equities as the year progresses. 

Do you expect foreign investors to trim India exposure going ahead?

Despite global cues, India looks much better among global emerging markets (EMs) given the post-election political stability, relatively better debt-to-GDP (gross domestic product) ratios and fiscal/current account deficit situation, with the RBI also in an easing mode. If US-China trade tensions ease or oil prices spike up (e.g. due to US-Iran tensions), then we could see a shift away from India to other markets.

What is the nature of flows to the Indian markets?

Aggregate year-to-date (YTD) foreign institutional investor (FII) inflows into Indian equities of $11 billion are not only one of the highest among EMs (ex-China), but also significantly higher than the last four-year annual average of $2.4 billion. Our analysis suggests that the increased FII flow is led by non-indexed allocations. As per our team’s calculations, indexed exchange traded fund (ETF) flows accounted for only 13 per cent of YTD total FII flows into India versus an average of near 40 per cent over last four years. This is also reflected in the price appreciation in only some stocks across the Nifty rather than a broad based rally. Given a likely US Federal Reserve (US Fed) rate cut cycle going forward, we expect inflows to EMs – including India – to pick up over the next six months.

What has been your investment strategy over the past six months? 

We have been overweight on private banks and underweight non-bank finance companies (NBFCs), but now we think some of the better quality NBFCs are worth investing in as liquidity will get better for them and valuations have come off sharply. We were earlier overweight IT Services, but given strong YTD outperformance with not-so-cheap valuations and risks of a slowing US economy, an underweight stance is recommended. Remain underweight on autos, and the cautious view remains given risks of further earnings downgrades. 

We like the gas utilities and the listed real estate sector. In mid/small caps, we were cautious until recently but given the price correction over the last 18 months and easing liquidity outlook, it is time to selectively buy good businesses with low debt, good corporate governance and low promoter leverage being primary filters. Unless there’s a dramatic change in the industry environment or valuations come off sharply, we currently recommend an underweight stance on IT Services, Telecom and public sector banks (PSBs).

Your estimates for FY20 corporate earnings?

For FY20, we expect NIFTY (ex-financials) earnings to increase by 14 per cent year-on-year (y-o-y), and by 29 per cent, including financials (due to various one-offs last year). Global commodity-linked companies could surprise negatively if trade wars worsen, but such companies contribute only 12 per cent of FY20 Nifty earnings growth.  

There could be some downside to earnings for consumer staples and auto companies – especially if the monsoon fails to recover and if there are no policy measures by the government to help boost rural incomes. Telecom could surprise positively if we see faster-than-expected stabilisation in competitive intensity. Overall for the Nifty earnings, there is a limited downside given that expectations are now more realistic and some sectors like financials, pharmaceuticals and materials will be coming off a low base last year.

Should one stay away from the consumption and the financial sectors there is economic revival?

Although there are no visible upside catalysts for the next few months, we think much of the likely bad news in these sectors is also priced in. For investors with an over 12month investment horizon, private banks are better and so are the better quality NBFCs that have access to liquidity and no major asset quality issues. In consumption, tighter GST (goods and services tax) compliance should also result in accelerated shift from the unorganised to organised sector.