 "Jigar Shah")
Foreign investors are concerned about a stable government at the Centre, control over twin deficits and continued reforms in the banking sector, says Jigar Shah, chief executive officer at Maybank Kim Eng Securities, in an interview with Puneet Wadhwa. Edited excerpts:
What is your return expectations?
Our Nifty50 target for 6–12 months is 10,500. In the event of an untested leader becoming prime minister (PM) with a thinly stitched coalition, the index could go as low as 9,200.
The recent behaviour of domestic flows also suggests some pressure, and hence, most participants would prefer a flight to safety in large-caps, chosen sectors and proven management.
And the key risks?
The key risks are an acceleration of global slowdown and no breakthrough in the China-US stalemate. Brexit is another event that could hurt, though indirectly. Currency usually appreciates prior to elections but would depend thereafter on the current account deficit and foreign flows. The markets are currently reflecting a return of the Narendra Modi government with a reduced majority. There could be an knee jerk reaction like in 2004 if the outcome is different and takes the market by surprise.
Will pace of foreign flows slow down?
EM flows this year have gone into China due to certain changes in MSCI indices. As the tightening in the US is halted, EMs are benefitting with greater inflows at the start of 2019. Flows to the Indian markets could be skewed towards the second half of the calendar year (H2CY19). Overall, the MSCI Emerging Markets Index has done well since the start of 2019, but India is lagging to an extent.
That said, foreign flows may not be as strong if a non-Bharatiya Janata Party (BJP) coalition comes to power. The effect of the election on the market, in the long run, is immaterial, but in the short term, it is. The other key challenges of reviving growth in the economy, job creation, agrarian distress resolution and private capex revival remain.
What will be the market impact due to the terrorist attack in Pulwama?
Putting aside our natural emotional reaction, a full-fledged war is unlikely. A protracted battle like Kargil would also be costly for both sides. Equity market investors are always prepared for systematic risk and barring any evidence otherwise, should remain invested.
Should investors completely stay away from mid- and small-caps then?
The appetite for small- and mid-caps would return once the cloud over liquidity and governance clears, and allocations to these segments increase. This is despite many small- and mid-caps trading at one-year/multi-year low and at cheap valuations with no material downside. Time horizon here should be two-three years for a meaningful return on investment.
How are the foreign institutional investors (FIIs) looking at India?
Foreigners are concerned about getting a stable government at the Centre, control over twin deficits, continued reforms in the banking sector, fast-tracking IBC process and mitigating concerns relating to non-banking financial companies (NBFCs) and pledged shares.
What are your key takeaways from the December 2018 quarter results ?
The aggregate of Nifty earnings seems to have gone down, driven by one-off losses in some companies. The trend in small- and mid-cap is not too different. In the past few years, a pattern has developed where consensus earnings are high at the start of the year, only to keep declining.
In terms of sectors, the earnings of consumer, software and select private banks were in line. Pharma was mixed. However, those in cement, materials, auto, metals, power and utilities and refiners were not up to the mark. Telecom and state-owned banks (SOBs) continue to bleed. Reliance Industries (RIL) is steady and has lent good support to the market and earnings. TV broadcasters and multiplexes were a bright spot. NBFCs surprised negatively.
What is your investment strategy for CY19?
We continue to like themes such as private banks and financiers with quality management and balance sheet, data and digital, media and entertainment, cement, autos, city gas distribution and power trading/transmission among others.
