The current spate of tariffs imposed by the US on different countries, including India, is just the tip of the iceberg and this could get chaotic, if taken lightly by Washington. In the long-run, for India, it could be positive as other trading members of the US like China and EU could have more favourable approach to India, considering the large domestic consumption scope present in the country, said Prashasta Seth, CEO, IIFL Asset Management, in an interview with Sangeetha G. Indian exporters could also get more favourable treatment in many of these countries, he added. Excerpts:
The Indian equity market has outperformed some of its peers. How sustainable is this performance and what are the main strengths of the market?
The current rally or strength in the Indian equity market is skewed. Only a handful of large-cap index heavyweights have been supporting the index levels and that has led to the outperformance of our market compared with its peers. This skewed market performance poses a risk to its sustainability. It will be difficult to sustain these levels, unless there is a more broad-based participation witnessed in the market.
The main strength in the market is the Q1FY19 corporate earnings season, which has just begun. The earnings have been quite positive so far; the trajectory that started last quarter is being maintained. The micro factors, which are improving in India, need more support from the macros to sustain the market rally and make it more broad-based.
Some experts foresee the market weakening soon owing to inflation, electoral uncertainties and higher oil prices. How are these factors going to play out in the coming months?
Our view in 2018 has been that macros would overweigh micros and the unfortunate scenario is that macros don’t look as rosy as they ought to be. Some political uncertainty could take place with some large state polls this year and the Lok Sabha elections next year. Apart from this major uncertainty, rising crude prices, weakening currency and global economic tariff wars are some of the big factors, which could topple the cart for equity investors during the year. We recommend investors not to expect any big gains in 2018 and to use the year for building their equity portfolio, as they would get multiple chances for the same.
With inflation going up, what changes do you expect in RBI’s monetary policy?
RBI has made its view clear at the last policy meet, wherein it highlighted its concerns for rising inflation in FY19. Inflationary pressures would normalise over the next couple of quarters as we head into the election season. We could expect another 25-50 bps hike from the central bank during FY19.
Subdued growth in earnings has been a cause of worry. What are your expectations from different sectors in the new earnings season and their impact on the market?
Overall Q1FY19 should maintain the green shoots of growth, which was seen in the last quarter. We expect NBFCs and private banks to report a strong set of numbers. We also see technology companies reporting better-than-expected earnings, though there could be some softening in their guidance. Margins are expected to be maintained. The pharma sector will see strong growth among the domestic pharma business because of small base effect seen after the goods and services tax (GST).
We expect strong order book numbers from the capital goods and infra space though execution done could be a cause for concern for the smaller players. We expect domestic consumption-oriented companies to report strong numbers, but these could take a marginal hit on margins. Auto space also should report strong volume growth, but margins could be hurt due to rising input costs.
Different sets of viewpoints are emerging as to how the trade war would affect India. How do you evaluate this?
The current spate of tariffs imposed by the US on different countries, including India, is just the tip of the iceberg and this could get chaotic, if taken lightly by Washington. To shore up the electorate support by focusing on bringing back jobs to the US, president Donald Trump is forgetting that he is trying to unsettle decades of globalisation, which took lot of capital and efforts to shape up. We don’t see any major negatives for India per se. In the long run, it would be positive as other trading members of the US like China and EU could have more favourable approach to India, considering the large domestic consumption scope present in the country. Indian exporters could also get more favourable treatment in many of these countries. But to be honest, it’s too early to take a view of how the whole tariff episode shapes up, as a lot is at stake and neither the US nor China or EU can take too much economic risk on this front.
How did the market take the Trump-Putin meeting last week?
The event was a non-event. The market sees Trump as a president who would always take serious efforts to lower the military tensions between the US and North Korea or Russia.
What would be the impact of crude oil and metal prices on the stock market?
Rising crude prices have added a lot to the financial imbalance for the Indian government over the last 6 months. We don’t see any sharp rise in crude beyond $80 a barrel and feel the market have factored in $70+ crude prices. In recent weeks, we have seen both crude and metals softening, which is a positive factor for the market. Most companies have been impacted in Q1 owing to high commodity and crude prices. Its softening should add to the margins in quarters ahead.
But considering the Aramco IPO, we don’t see any sharp decline in crude prices either and would remain in the $65-$85 range. The market has factored in this range and we don’t see any major impact on the market from crude and metal prices in the near-term.
Evaluating the movement of the market, what would be your advice for the investors on their near and medium-term strategy?
We have been advising clients to remain invested in quality companies where there is earnings visibility and valuation comfort. Investors should make exits from overvalued midcaps and smallcaps where earnings are not supportive of valuations. At the same time there are some midcaps and smallcaps, which are of high quality and are available at attractive valuations now after the corrections and investors could take exposure to these names. Our advice to investors is to have a more realistic expectation of returns from equities over the next 12 months. Investors should keep expectations low in CY18 and use corrections to build their equity portfolio with quality names.
sangeethag@mydigitalfc.com
