Escalation in trade war may impact equities as asset class
Interview: Hitesh Agarwal, Executive VP and head of research, Religare Securities

The Indian economy is facing several challenges, including elevated global crude oil prices, input cost inflation, uncertain monsoon trend, challenging fiscal condition and developments pertaining to global trade protectionism. All of these may be sentiment dampeners depending upon how these events unfold, said Hitesh Agarwal, executive vice-president and head of research, Religare Securities, in an interview with Sangeetha G. But on the other side, sustained government reforms, improving corporate earnings and signs of rural demand picking up are in support of the market, he remarked. Excerpts:

In July we saw foreign portfolio investors putting money into the Indian equity market, arresting the withdrawal trend of the past few months. What are the factors behind the increased interest? Is it a short-term phenomenon?

The reasons for the strong bounce-back in the Indian stock market can be attributed to the economic recovery, currently under way, with key policy decisions like the goods and services tax (GST) now better entre­nched into the system and corporate earnings also indicating some pick-up. Softening of crude oil prices by around 8 per cent in the last one month and stability in the Indian currency have also been factors supporting sentiments. Moreover, after the correction witnessed in the market since the beginning of the year, it has attracted some fence sitters seeking better entry points into the market.

Going forward, while there is little doubt about the sustena­nce of foreign portfolio investment inflows into the Indian equities over longer time periods, temporary pull out of funds is always possible depending on how various global and domestic developments unfold.

Why debt market continues to witness withdrawals?

Concerns with respect to elevated crude oil prices, firming retail inflation, fiscal challenge, pressure on the currency, global trade war uncertainties and a strengthening US interest rate trajectory are the factors that have prompted outflows from the Indian debt market in the recent months.

 Will the trade war fears continue to haunt the equity market, especially after the US was found making peace with Europe and partially with Russia?

Developments on the global trade war front will be on the market radar. Any escalation on this front will be a negative for sentiments to begin with and has the potential to impact eq­u­ities as an asset class, as inv­estors get into the risk-off mode and towards safer investment havens. Moreover, considering India’s import-export trade dy­namics, the importance of foreign capital flows for the current account deficit financing and the consequent impact on the rupee, and heightened global trade tensions will be an unwelcome development for the equity market.

Do you think the US may take a similar stand with China and defuse trade war?

While it is difficult to guess what the US stance will be with respect to its trade war with China, the market will definitely welcome any easing of tensions on this front between the two countries.

How do you evaluate the performance of stocks across sectors in June, considering the results that are already out?

The earnings for the first quarter of FY19 have been encouraging along the expected lines considering that the low base effect of the same quarter last year, impacted by GST implementation, lent some support to the growth numbers. Com­panies have reported a strong topline growth of around 20 per cent thus far. However, considering the bottomline performance as yet, consensus expectations of around 20 per cent earnings growth for the first quarter might get challenged as disappointments in earnings generally tend to creep in during the latter part of the earnings season.

Which sectors stand to gain most from the recent GST rate revision?

Sectors including paints, footw­ear, hotels and consumer dur­ables like refrigerators, washing machines and television sets are the beneficiaries of the re­cent revision in the goods and services tax rates.

Inflation and crude oil prices are weighing heavy on the Indian economy. How will they affect the prospects of equity market?

Rising crude oil prices have an adverse impact on the macro-economic situation of the country as it has a direct impact on the country’s import bill, which in turn has a negative impact on India’s twin deficits. Moreover, higher crude oil price leads to higher fuel inflation, which has the potential to impact the disposable spends of households and thus affect the gross dom­e­stic product (GDP) growth adv­ersely. Further, since crude derived products are raw materials for India Inc, corporate margins/profitability come un­d­er pressure. Thus, the above fa­c­tors get reflected in a vola­tile-to-weak equity market.

How will be the market movement in the short- to medium-term and what would be the factors supporting such movements?

The Indian economy is facing various challenges on the horizon including elevated global crude oil prices, input cost inflation, uncertain monsoon trend, challenging fiscal condition and developments pertaining to global trade protectionism. All of these may be sentiment dampeners depending upon how these events unfold. But on the flip side, sustained government reforms, improving corporate earnings and signs of rural demand picking up are in support of the market. Further, any alleviation of one or more of the concerns will provide an additional fillip to sentiments. Thus, for the medium- to long-term, we would recommend sticking to quality companies and accumulating on every reasonable dip in the market in the short-term.

sangeethag@mydigitalfc.com

Columnist: 
Sangeetha G.