With events such as a Fed rate hike and the Reserve Bank monetary policy lined up in June, shares could remain choppy in the near term, says Vibhav Kapoor of IL&FS.
But the medium term outlook remains strong even as two risks, a weak monsoon and Brexit, could upset the applecart.
In an interview with CNBC-TV18, Kapoor said that even as valuations from a short-term perspective may look expensive, investors should buy shares with a 18-24 month view.
IL&FS yearend target for the Nifty is at 8,700-9,100, which may go up to 8,800-9,400, he said.
Sonia: Things have been hunky-dory for the market in the month of May. That age old theory of sell in May and go away has not worked for anyone. What is the sense you are getting about the month of June? Do you think this bonhomie could continue?
A: I don’t know about the short-term. We have already gone up a lot. So some correction could always happen. We have two-three important events in June. We have the Reserve Bank of India (RBI) policy here and then we have the Federal Reserve meet and then we have the British referendum. Then we have the onset of the monsoons. So we have to look at all those.
However, by and large that is going to be immaterial as these are all short-term things. So you could have some correction in the market. The overall trend is undoubtedly up now. There is no doubt about that. Therefore, over the next few months or over the medium-term, we are going to see higher levels coming forward.
Reema: Even if the Fed hikes in June, you think it is priced in and the global markets can conquer that and move up?
A: What has happened of late is that, the global markets seem to have become very comfortable with a small rise in interest rates in the US and the way investors are looking at it is that this means that the US economy is doing well. Therefore, a moderate increase in interest rates is not going to hurt anybody and it has been taken as a positive.
My feeling is that, you are probably going to have a situation where there is going to be moderate hikes in interest rates in the US, moderate strength in the economy in the US and probably all over the rest of the world including emerging markets. So it is going to be pretty good situation for equities to be in globally and my sense is that you are going to have a substantial upmove in equities globally and not only in India but also in the US and other emerging markets.
Sonia: This kind of consensus bullishness is a bit scary. 10 out of 10 people who we have spoken to so far believe that the market is moving up higher in the near-term and medium-term and that is when you know for sure that the market may just not oblige but what do you think could be the risk to the market on the upside?
A: One is that in the short-term, it may not go up. So I don’t know about that because we have already gone up a lot. The biggest risk from the Indian market point of view is the monsoon. If the monsoon forecast does not turn out to be correct and if the monsoon fail or there is a repetition of the last two years then obviously that is a big downside risk to expectations. So I think all that we are saying is keeping an assumption that the monsoon forecast will turn out to be correct. That is one big risk.
The other risk at least temporarily could be negative British referendum result in the end of June, which could then cause a fair amount of volatility in markets all over the world including India and you could get some sharp downside moves for some time.
The other risks of course have been the Chinese risks for hard landing but I think that has reduced very significantly over the past few months or a recession in the US, which obviously doesn’t seem to be happening.
Then at the end of the year, we have the US presidential elections, which is completely an unknown at this point of time.
Looking at the overall picture, I think provided the monsoons are good and the forecast turnout to be true, we are headed for a substantially good period over the next few months.
Reema: This quarter Larsen and Toubro (L&T) positively surprised after many quarters of a disappointment. Would you start betting on the investment oriented sectors as well as individual stocks and if yes, which ones?
A: I think, it is still a bit early for the capital good sectors to play that because that is a late cycle sector and we are in the early stages of this cycle. However, yes, some signs of improvement obviously had started coming in and over the next 24 months, this theme could play out very well.
However, before that probably there are other themes to play upon, which is basically the consumption theme, the finance companies, rural oriented consumption particularly. Those themes will play out earlier and then you will have the capital goods at a later stage.
Sonia: Don’t you think these finance companies, the non-banking financial companies (NBFCs) or even the consumption oriented stories have gotten a bit crowded right now? Everyone is buying into paint companies, into NBFCs like Shriram Transport , Bajaj Finance etc, where do you see value here?
A: They have, there is no doubt and that is why I am repeating again that maybe in the short-term for the next one-two months nothing much may happen. The markets may go into a correction or they may go sideways. However, what happens is a bull market is that the valuations always keep ahead of the fundamentals and that is what is going to happen again.
So they will always look expensive but as time goes by, the market starts to discount things well in advance or right now it is discounting maybe FY17 and then maybe four-five-six months down the line, it will start to discount FY18 and so on and so forth.
So, they will look expensive and they are expensive in the short-term. I think what is going to happen is in particularly if you have a good monsoon and if this global scenario plays out, your growth rates probably in earnings are going to be much higher than what the market is anticipating right now if not in FY17 definitely in FY18 and FY19. So we remain pretty bullish on that.
Reema: This quarter also many auto companies like Bajaj Auto , Tata Motors have positively surprised the street but these are stocks, which have already seen a near 50 percent recovery or pullback from their February lows. Would you still recommend a buy on auto stocks or do you think it has run up too much and you would wait for a bit of a dip to enter?
A: Generally, auto industry will be one of the bigger beneficiaries of an economic revival particularly in the rural economy. Therefore, over the next 24 months or if you look at a 24 months perspective, these stocks are not very expensive. They might be expensive in the short-term. So this is a market where you need to look at it from an investment point of view. You need to look at an 18-24 months horizon. If you are looking at a six-nine months horizon, you will find almost everything expensive and you may not be able to buy anything. So you have to look at a longer-term perspective, it is an investment market.
The other thing is since it has gone up a lot, probably it is not good to chase stocks at the moment, you will get a correction sooner or later, you always do and that will be the time to buy.
Sonia: If you had to give us a range for this market, what do you see as the upside for this range because we are not too far away from our all time highs? In over the next three-six months, how much higher do you think this market could head?
A: We had a target for March 2017 of between 8,700 and 9,000-9,100. If things go well globally as well as the monsoons are good, I would up that target a little bit from 8,700-9,100 to maybe 8,800-8,900 to 9,400.