Mid-and small-caps appear relatively attractive: BNP Paribas' Raychaudhuri

Election outcome-related uncertainty has failed to dent market sentiment, with the S&P BSE Sensex and the Nifty50 hitting new highs last week. Manishi Raychaudhuri, Asia Pacific Equity Strategist at BNP Paribas, tells Puneet Wadhwa that in the medium term, monetary policy stances of global central banks are bigger variables governing flows into emerging markets (EMs) than domestic political news. Edited excerpts:

What is your near-term outlook for the markets? 

Indian equities look good from a medium-term perspective. In the near-term, however, the markets could take a breather after the recent sharp rally. In case of significant volatility around the election, investors should add to their India positions, unless of course, we end up with the “worst-case” scenario of a hung Parliament and a government formed by a disorderly coalition of parties having divergent views. The probability of this eventuality is quite low.

Would you revise your December target for the S&P BSE Sensex  in case the election springs a surprise?

We upgraded our 2019 S&P BSE Sensex target to 42,000 as well as upgraded Indian equities to ‘overweight’ in our Asia ex-Japan model portfolio. The upgrade is based on likely fundamental improvements — primarily, improvement in private capex and decline in cost of capital. Election outcomes usually have a temporary impact on Indian markets, unless we are faced with the “worst case” scenario.

What factors can trigger a correction?

A correction could be triggered if risks to global growth, particularly in the Eurozone and in the US, play out more meaningfully than anticipated. Further, the expected resolution to the US-China trade conflict gets significantly delayed. An adverse election outcome and the continuation of depressed consumer sentiment are bigger risks.

Your view on mid- and small-caps?

After their sharp underperformance in 2018, mid- and small-caps appear relatively attractive than a year ago. That said, it’s difficult to paint all small- and mid-caps with the same broad brush given the divergence in their business models and growth opportunities, even in the same sector. Mid-caps with strong growth opportunities and attractive business models are concentrated in financials, healthcare and industrials–notably, manufacturers of machinery and auto ancillaries. On the other hand, information technology (IT) services, materials and automobiles don’t throw up too many attractive mid- and small-cap ideas.

What’s the road ahead for foreign flows into Indian equities?

In the medium term, monetary policy stances of global central banks are bigger variables governing flows into the emerging markets than domestic political news. Their stance is likely to stay benign for now. Our global economics team believes the US Fed shall not make any changes to the Fed funds rate till 2020. Election outcomes do influence flows into India but in the short term. In the past, positive election outcomes did result in relatively larger flows into India, but over a 1.5–2-month span.

What are your expectations from the March 2019 quarter earnings season?

For FY20, we expect early to mid-teens earnings growth from companies comprising the broader Indian indices. The current Bloomberg consensus growth estimate of 18–19 per cent appears aggressive. In the March 2019 quarter and beyond, financials could surprise positively while results from IT, materials and automobiles could be lacklustre.

How should investors play the banking and finance theme?

More consolidation in the finance space could be on the cards. There are many banks that need capital to grow or to take care of their asset quality issues and there are NBFCs for whom a banking license would come handy for diversification. Banks are looking at inorganic growth. We like private banks – a combination of retail lenders and corporate lenders. Among NBFCs, we like those engaged in consumer finance. 

Is it a good time to buy auto stocks from a 12–24-month perspective?

From a 12–24 month investment outlook, exposure to select auto companies is justified, particularly to those that have dominant market shares and superior distribution reach or are leaders in their niche segments. In the near term, depressed consumption sentiment and upcoming cost increases due to safety  and enhanced emission norms could continue to affect the performance.

Do you see more rate cuts by the RBI?

The market is not concerned about a deficient monsoon and its potential impact on inflation. The dominant opinion on monetary policy seems to be another rate cut by the RBI in June or in August. The correlation between monsoon precipitation and agricultural production and agricultural product prices have also declined over the past few years. That said, in the prevalent climate of rural distress, significant disruption in the spatial and temporal distribution of monsoons could generate additional headwind to consumption sentiment.