There is a need for more follow-on action on reforms from the central government, is the word coming in from Sanjeev Prasad of Kotak Institutional Equities. As far as the macroeconomic situation is concerned, India is in a very safe spot, he says. The only missing piece, according to him, is growth.
“Consumption at the moment is weak, private sector investments are nearly dead and net exports is suffering as a consequence of whatever is happening globally,” he told CNBC-TV18. Based on this, he is taking the 7.5-8 percent GDP growth figures with a pinch of salt.
Also, Prasad says interest in emerging markets is low and India too will get impacted because of FII redemption pressures. However, he believes external sectors such as IT and pharma are doing well at the moment. It may also be a good idea to play themes linked to macroeconomic development, he adds.
Going ahead, he expects Nifty EPS to be cut by another 5-6 percent for this year.
Sonia: Do you see much more upside to the market now after the 50 bps rate cut or do you think global weakness will come back to haunt us?
A: It is hard to say in the short-term but I would think 50 bps cut is definitely a positive surprise. We need to see more follow-up action in terms of some headline reform being put in place by the central government and some of the state governments are also doing right things, so we may see some news over there. We are heading into Q2 earnings numbers. So let’s see what comes out over there. Hopefully the pace of earnings downgrades will start stabilising over this quarter or so, so that should again help and let’s see where the global sentiment stabilises because as of now people are still very negative on growth issues everywhere in the world and as far as emerging markets are concerned, there is very little interest as far as emerging markets in general. So any rally based on 50 bps cut – you will have to look at a lot of other sobering issues which are there.
Latha: Something more in terms of the other takeaways from the monetary policy. The forecast for inflation for FY17 is benign, the Reserve Bank of India (RBI) at the moment sees at 4.8 percent but they have upgraded growth for FY17 to 8 percent though FY16 growth has been downgraded, any comment overall, any key takeaways for the health of the economies in the macros for the coming year?
A: The macroeconomic position of India is very good. I think for the last several years I have never seen the macroeconomic position in such good shape, in the sense you have current account/ balance of payments (BoP) which is very much under control. The Q1 current account deficit is at 1.2 percent and that should be the number for the full year also, so that is very manageable. Inflation and interest rates are coming off, so that is a positive and the fiscal situation is also looking reasonably good.
The missing piece as far as macroeconomic situation is concerned is growth and I suspect growth will continue to a challenge for the next three-four quarters. If you look at the basic gross domestic product (GDP) construct, as of now we have three of the four items which are just not moving, consumption is weak, private sector investment is dead practically and you have net exports which are suffering because of the way global economy is slowing down. So the only real driver left is government spending, in a way the government is trying its best. I see the capital expenditure numbers for the government for first four months is up 39 percent but within the fiscal construct the government can only do that much. So put all this things together, it doesn’t look like growth is coming back in a big hurry. I still have a lot of issues with GDP numbers. This doesn’t look like an economy which is growing at 7 percent plus when you see some of the real data etc, it doesn’t look like we have an economy which is growing at 7 percent plus, so I would take 7.5-8 percent growth number with a large pinch of salt.
Latha: I am asking you in terms of growth downgrade that it came and the number is a bit fuzzy. How does it translate for you in terms of earnings? Where are the companies in which you see earnings growth coming?
A: If you look at BSE 30 or Nifty-Fifty index, a lot of earnings hasn’t got much to do with India, about 50-60 percent is not directly linked to India GDP but having said that at this point of time even the companies which benefit globally, even they are not looking that good particularly the entire commodity basket. So the sectors which are still doing okay seem to be the external sectors like IT and pharmaceutical space, other than that anything linked to domestic GDP, industrials etc, they will take some time to recover. However, some of the other sectors which are not that dependent on the GDP such as power sector, utilities kind of names, there the growth numbers still look intact. So if I put all the numbers together then for March ’16 we are looking at about 13 percent odd growth for the Nifty-Fifty. My sense is you will still see the downgrades in autos and industrials maybe little bit in the energy names also given where food prices are. So ultimately we should end up somewhere about 10-11 percent net profit growth for the Nifty-Fifty index for the current year.
However, for next year we have about 18 percent growth which means we have already build in some recovery, economic activity and GDP for next year. So let’s wait and see how the recovery process starts and how strong that is. So my sense is its 18 percent maybe on the higher side, it could probably come down to 18 percent or so. So net-net there are some earnings downgrades which I have yet to watch to the numbers and that is the real challenge over here, in the sense stock market corrects but how much more the earnings numbers will correct, is a real issue over here.
Sonia: How have you read into the flow situation because luckily for us the domestic money is solid and that continues to protect our downside but foreign institutional investors (FIIs) have been selling relentlessly and even after the big trigger yesterday there was a sell figure of Rs 1,100 crore by FIIs. Do you expect this redemption from FIIs to continue?
A: Looks like as of now nobody is interested in emerging markets. If you look at the kind of returns emerging markets have delivered over the last six months-one-three-five years, they have given about 20 percent negative return which is disastrous. Emerging market index is down about 30 percent on five year basis in dollar terms whereas the developed market index is about 30 percent. So you cannot have emerging markets performing so poorly and expect money to come in. So as of now whichever emerging market investor we talk to is feeling pressure as far as redemption is concerned or not seeing any inflows coming in which effectively means whether India does well on its own count in terms of relatively better macroeconomic positions, some reforms moving ahead, GDP is still growing relatively stronger compared to many emerging markets.
We will be clubbed with other emerging markets and given the fact that interest levels in emerging markets are low at this point in time and India will also suffer the consequences of any redemption that you see in emerging market funds. I think this process will continue for some time and this could continue till the time global investors either start feeling more comfortable about any turnaround in the macroeconomic position of some of the more distressed emerging markets and that’s still sometime away, in the sense emerging markets running very high twin deficit, high current account and high fiscal deficit or some of them are running very high current account deficit. Till the time you have high commodity prices and high global liquidity, all the wounds would probably get covered but that’s no longer the case.
The other thing which would happen is the market gets crushed so much that people start doing some amount of bottom fishing but that’s an issue of how much earnings numbers have been cut and whether that is sufficient or not. So as of now emerging markets will continue to see outflows which means we have to rely on domestic money and I hope that continues because that is the only thing which is holding up this market otherwise it would have been lot more in line with some of the other emerging markets.