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The markets have failed to cling on to higher levels. Rakesh Arora, managing director and head of research at Macquarie Capital Securities (India), tells Puneet Wadhwa they now need an improvement in fundamentals before they can go up and sustain at higher levels. Though a revival in sentiment can take time, the downside appears limited, he says. Edited excerpts:
What is your interpretation of how the markets have panned out in 2015?
While expectations of a quick turnaround in the economy was probably unwarranted, given the severity of India's economic mess, one can only point to the National Democratic Alliance (NDA)'s exuberant election campaign for fuelling such expectations in the first place. That said we believe it is premature to give up hope on the India story, temporarily rendered volatile by global events and domestic political one-upmanship.
Some recent events, such as unseasonal rain and a weak monsoon prediction, have also put a question mark over already subdued rural demand. Additionally, anecdotal evidence suggests companies are not seeing material changes on the ground, perhaps reflected in their weak earnings, and foreign investors appear to have taken cognisance of that by cutting exposure to India in recent months.
Have the markets over-reacted to variables like growth, rupee, inflation, monsoon forecast and interest rate outlook?
This was probably justified, as nothing much is happening on the ground. Now that the markets have corrected about 13 per cent from their peak levels, I think we are closer to the bottom. Though a revival in sentiment can take time, the downside appears limited.
How do you see foreign institutional flows amid talk of China-A shares getting included in the MSCI indices?
The flows have slowed since quite some time. This year, they should be slightly lower than the previous year. Having said that, we are not expecting any negative flows. This is despite the possibility of the US Federal Reserve raising rates.
The mid- and small-cap space has seen a far greater rout than their large-cap peers in the recent correction. Is the worst behind us or should one stay away from these baskets for now?
It is more of a stock pickers market right now. I won’t deliberate if one should stay away or not but recommend that investors should evaluate the companies before buying. I suggest staying away from levered companies.
What are the biggest risks for the Indian markets?
For the moment, the monsoon is one of the key risks. The second is the reform process being obstructed by opposition parties and the third is any shock related to crude oil prices. There are different forecasts on how the monsoon will pan out this year and it is difficult to predict. A shock on account of oil and the rupee are low probability events, in my view.
Has this become a sell on a rise market?
The markets are failing to sustain at higher levels because there is no support from the fundamentals. They need an improvement in fundamentals before they can go up and sustain at higher levels. We hope the action on the ground really picks up now. The government is making intense effort and we should see a pick-up over the next two-three months. We have a Nifty target of 9,600 by December 2015.
What all points do you expect the government to deliver on over the next few months that will act as a trigger for the markets?
We need to see a revival in demand. Once the government starts spending on infrastructure, we should see an improved demand for steel, cement, construction equipment. All this will feed into the economic recovery cycle.
We are basically waiting for just two reforms – the GST (Goods and Services Tax) and the Land Acquisition Bill Amendment. Land Acquisition Bill has become the bone of contention between the government and the opposition which is terming this move ‘anti-farmer’ or ‘anti-poor’ and refused to support the bill. Given the politically sensitive nature of the issue, the government too is treading cautiously, particularly in light of the coming state elections in Bihar later this year and UP a couple of years later.
Are there any sectors you like at the current levels?
We hope for a revival in government-led infrastructure. As a result, construction (roads) is where we think that there is a catalyst in the near term. Stocks from pharmaceuticals, fast-moving consumer goods and information technology sectors have corrected sharply from their peak levels. A depreciating rupee will also be of help here. However, we remain a 'neutral' position as regards these sectors. We remain underweight on consumer staples because we think they are still trading at very high valuation. We believe there is a better upside available in the stocks from the cyclical sector.
What is your analysis of the recent earnings season? By when do you see a pick-up / revival?
The first quarter of the current financial year (Q1FY16) doesn’t look that promising. The government is still trying to push key reforms through and it has already taken up the first few months of FY16 without much improvement. I think things should start improving from the second quarter (Q2FY16) onwards.
Most sectors have reported a weak performance in the recently concluded quarter and there should be an improvement across the board. However, infrastructure, industrials, private banks and automobile sectors in particular should see an improvement in earnings Q2FY16 onwards. For FY16, we expect a growth of 16 per cent and around 19-20 per cent in FY17.
DISCLOSURE: Macquarie Capital Securities (India) Private Limited, formerly known as Macquarie Capital (India) Pvt. Ltd. is a SEBI registered Research Analyst having registration no. INH000000545. Mr. Rakesh Arora, Analyst certifies that he and his associates/ relatives do not have any financial interest in the subject company and for Company specific disclosures, please visit the website at www.macquarie.com/disclosures.
