Crude price may moderate as supply could outpace demand, which is likely to benefit the rupee, and consequently the pessimism should reduce, said Prashant Sharma, chief investment officer at Aviva Life Insurance, in an interview with Falaknaaz Syed. Hence, the fears of fiscal deterioration could abate and foreign portfolio flows improve. Excerpts:
The market is in a correction mode. How much downside do you expect for the Sensex and the Nifty?
There is pessimism in the market and the 15 per cent correction in the benchmark Nifty Index and much more in the broader market factor in most concerns. Issues like the US-China spat, crude at $80, depreciation of the rupee, deterioration of CAD, lower GST collections and some reduction in earnings estimates for companies are already known and factored in. Also, the market capitalisation to GDP at 0.65x is not expensive. Polls could be a potential risk for the market. But we expect to have a stable government. We are expecting the market to inch upwards in the next few months as crude and the rupee stabilise at better levels.
How will Q2 earnings be? When do you expect a revival?
We expect Nifty companies to report a 15-16 per cent growth in earnings in Q2, supported by a favourable base, but lower than market estimates of 20 per cent growth. The IT sector may lead the earnings season as robust revenue growth supported by a weak rupee benefits the margins and profits. The financials and commodity companies should also report strong earnings, but sectors like cement and automobiles may suffer as rising input and energy costs may impact. For the benchmark Nifty index, the consensus estimates for FY19 and FY20 are on the higher side and may see course correction similar to the past few years.
The rupee has breached 73 and Brent is at $83. What impact could this have on the market?
Developing countries run a higher inflation relatively and most suffer on current account and fiscal deficit fronts. Hence, depreciation of the currency compared with the developed economies is expected. We also need to keep in mind that depreciation of the currencies could be lumpy, but in the longer term depreciation seems in line with the respective economic models.
In the last 10 years, the rupee has depreciated at 5 per cent CAGR and had been stable for 3 years but as we saw 12-15 per cent depreciation in a few months, the market seems to have made a big deal of it. In the past 6-8 months, the emerging market currencies have also depreciated 6-15 per cent. Also, based on RBI’s REER index, the rupee is still overvalued. We expect crude oil price may moderate as supply could outpace demand and this will benefit the rupee, which has reacted sharply, and consequently the pessimism should reduce. Hence, the fears of fiscal deterioration could abate and foreign portfolio flows improve.
Election years increase pressure on the fisc and spur inflation. What’s your take?
Given that the election is a few months away, some populism is a possibility. But it could be lower than the previous election cycles. Fiscal prudence has by and large taken precedence. While there might be a risk of slippage from the 3.3 per cent goal for this year, the slippage may not be more than 10-20bps against the skepticism of 50bps in the market.
India is the fastest growing large economy and at this stage inflation of around 5 per cent may not be a cause for worry. We are comfortable with the inflation outlook for the foreseeable future.
What’s your view on foreign fund inflows in current situation?
Crude oil price has surged sharply in the past few months, which caused excess pessimism on the Indian fiscal and external position and contributed to the sharp depreciation of the rupee. We expect a period of lower prices, which should calm the market and support the flows back to countries like India. The trade war may cause a slowdown in global growth, which will be detrimental for all. But on a relative basis, India should be in a better position compared with its Asian peers.
Even as foreign institutional investors have sold $7 billion equities in FY19, the $11 billion inflow from the domestic investors has supported the market. We expect FII flows to resume once crude and rupee stabilize, and there is some sort of reversal of the trend in flows from developed to emerging markets.
What are the major global and domestic negatives that can weigh on the market?
The saying ‘when elephants fight, grass gets butchered’ looks apt for the current state of global economy. With US and China, head to head in the trade war, the global economy has started suffering with macro data beginning to show weakness. The other key issue could be the US mid-term elections. But the biggest risk is monetary tightening and balance sheet reduction/tapering by central banks in the developed world. It could affect not only the cost of money but also liquidity conditions. The Fed has been citing robust data on the US economy for faster rate hikes. As the data is expected to moderate, we expect the Fed to recalibrate its stance on rate hikes. This should calm market, which fears that the Fed may tighten more than required.
The market is nervous towards domestic polls and we need to monitor the way the NBFC saga pans out as it may impact liquidity available to certain sections of the economy.
How should investors approach the mid- and small-cap space?
It’s important for investors to determine the quality of businesses they are investing in; track record and right disclosures are among the important factors to determine the investment potential in a company. The froth in mid- and small-caps has reduced a bit and several quality businesses have seen a drop in valuation led by a sharp 30-50 per cent decline in stock prices, but most still expensive with less margin of safety especially in a volatile market environment. We continue to prefer large-caps to mid- and small-caps and shall wait for better price points to enter mid/small cap stocks.
Which you bullish on? What are the big themes you are betting on this year?sectors are
We continue to like the larger private banks. Now with some PSBs and NBFCs under compulsion to lower the pace of lending, albeit for the near-term, the opportunity available for the private banks to gain market share is immense. The scare of NPAs impacting the balance sheet of industrial lenders has been reflecting in the stock prices and the resolution of these assets may turn out to be better than expected. The recent correction in automobile and associated companies offers an opportunity to own these brands. The IT space is also robust.