India continues to best growth space globally. Higher valuation and some stress on the macro front will mean kind of a range-bound market for couple of months but revival of corporate growth implies a sustainable long-term bull market is here to stay, said Shailendra Kumar, co-founder and chief investment officer at Narnolia Securities, in an interview with Ritwik Mukherjee. Excerpts:
Though there is reconciliation in the US-China tariff war, the period of adjustment will take some time. What would be the likely impact on Indian economy and the capital market?
We are living in a more connected globalised world and issues li?ke the US-China trade war are ki?nd of a correction. Globalisa?ti?on in the beginning was more ab?out goods, services and ideas mo?ving from developed economy to emerging economy but later half of globalisation had been more about goods and services moving from emerging econom?ies to we?stern developed econo?m?ies. Im?balances on any side us?ually follow balancing measures.
China’s multi-billion dollar tr?ade surplus with the US and its po?licies on technology, industry development and access to state-dominated economy is key concern for the US. After every rhetoric on tariff, we see steps of reconciliation by both sides that am?ply indicate that there is a very le?ss chance of escalated tariff protection war by larger global eco?n?o?mies. Though the period of adj?ustment will see some fall in gl?obal trade and resultant negative impact on global GDP gro?wth, but the period of adjustment will be volatile but not destabilising.
What are your main concerns about the current market?
For long, the world economy had been in a highly accommodative monetary policy and benign inte?r??e?st rate regime. We have ente?r?ed an economic regime where in?t?erest rate is rising globally. It wo?uld make asset prices volatile. For last 7-8 years we had kind of lin?ear growth in equity prices pa?rticularly in the US. Last year we had sort of a climax. Daily avera?ge of the US VIX, volatility indicator had hit all-time low. Lower risk (or volatility) implies lower re??t??urn and higher risk implies hi?gher return is the standard max?im. But the recent low volatility produced higher return from eq?uities. We believe era is over. Sta?rt of 2018 had been all about risi?ng volatility particularly in the underlying asset prices. This re?g?i?me switch would be followed by lots of shift in the market positi?o?n??ing resulting in higher volatility particularly in emerging econ?om?ies stocks.
Domestically, rise in crude and other commodity prices imp?l?ies possibility of revival in inflation trajectory. Though, RBI in its last credit policy hinted of a long pause in rates but pressure on in?flation due to rising crude price, low appetite for emerging market bonds among foreign institutional investors, tightening in the US bond market, liquidity swinging from surplus to deficit in money market implies that bond yield may remain elevated in India.
How are institutions/FIIs looking at India?
In last one-year domestic flows has consistently been ahead of fo?r?eign institutional inflows. Data for 2018 suggests inflow by do?me?stic mutual funds is outnumbering FPIs by 4:1. A similar tre?nd will continue in the near fut?ure. With base of low equity participation in India and rising relative attractiveness of equity inv?estment implies continued stro?ng inflows in equity mutual fun?ds. On the other hand higher valuation, rising bond yield and bit of macro stress in terms of rising fiscal deficit implies foreign flows will remain restricted.
Are there opportunities in the present market?
India continues to best growth sp??ace globally. Higher valuation and some stress on macro front will mean kind of a range-bound market for couple of months but revival of corporate growth im?plies a sustainable long-term bull market is here to stay. One way to understand the bull market is th?at the valuation multiple swings between its long-term average and its upper bou?nd. If we take the Nifty, it would imply that the Nifty will keep trading between PE multiple of 17 and 22 in for?t?h?coming years. Larger opportun?ity would be in spaces that are linked to changing lifestyle. The way we consume as well as pr?odu?ce goods and services are un?dergoing a major reset and this will throw multiple wealth creation opportunity.
Where do you see the Indian market five years down the road?
The Nifty from September 2013 to January 2018 saw a rally from 5,471 to 11,171. This rally of 104 per cent was more due to change in price multiple than earning gr?owth as PE changed from 14 ti?mes to 21.5 times. Presently, the Nifty is trading at 19 times its FY19EPS. Anytime market falls to the level of one year forward PE of 18, it offers an excellent op?portunity for investment. Al?ong with global issues, there are multiple state elections in India this year. Outcome of these elections would surely influence ma?rket, as these will be an indication of all important general elections next year.
But corporate earning over 3-5 years is expected to be strong, so negative surprises if investors to accumulate equities should use any. Although unlike 2014-17 where the rise in the market was mainly due to the valuation multiple re-rating, the rally now will be in line with the earnings growth instead of valuation re-rating. Our base case implies 14 per cent CAGR return for the Nifty over the next 5 years.
Which sectors you would bet on at this point of time?
Digitization in India has changed the way of living. On the other hand GST implementation will have a long lasting impact on the structure of businesses. Seed of shift from unorganised to organised market has been planted. Along with this shift what is playing out in India is what we call – professionalisation of the Indian businesses. Look at it this way, why we categorise paints in a branded space and not a com?m?o?dity sp?a?ce and assign high mu?l?tiple? Professiona?lisa?tion will result in many such categories in India whether in manu?fac?t?u?ring or in services. We also continue to like private banking and the entire consumption sp?ace. Also one may allocate some investments in metals and PSU banks where we are hopeful of strong cyclical recovery.
How long will the pain persist for PSU banks? Is there value in the private banking space now?
Despite the noise, we believe we are close to the end of this NPA saga. Total advances by PSU ba?nks are Rs 54.69 lakh crore. GNPA is about 15 per cent and NNPA 9 per cent. Of the Rs 5 lakh crore NPAs, Rs 4 lakh crore is from just 40 accounts that are already in various resolution stages in NCLT. Also standard re-structure is another 7-8 per cent and if 70 per cent of it will go to NCLT as per recent RBI directives then 5.5 per cent more will be added to NNPA. So, total NPA will swell to 14.5 per cent.
It would require further provisioning of about Rs 1.80 lakh crore. But the average run rate of provisioning over last 8 quarters had been Rs 50,000 crore. So in FY19, the Indian banking sector, at least in terms of NPAs, will come out in a better shape.