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    Mahesh Nandurkar on why FY20 should be a better year for market

    Synopsis

    FIIs still a bit concerned on the valuation front in India, says the CLSA India strategist

    Mahesh-Nandurkar-CLSA-1200
    Going forward into the second half, we will probably need to deal with the full impact of the liquidity issues and the higher cost of funding, Mahesh Nandurkar, India Strategist, CLSA, tells ET Now.

    Edited excerpts:


    On whether Indian markets can deliver next year after a subdued 2018

    We have been cautious on the Indian markets for some time. Some of that cautiousness has played out with the markets correcting over the last few months. But we feel that the combination of some of the macro concerns that we have had are still around, the primary being the rising interest rate environment in the country.

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    We believe that the Indian economy and the corporate balance sheets have not yet fully factored in the cost of higher funds and that is one thing that we need to keep in mind. The second concern has now got addressed to some extent with the oil prices correcting the way they have over the last one month or so. But our house view is still that there is still an upside risk to oil rather than a downside risk. It is not a big issue at this point in time.

    But we need to keep in mind, that till the elections, there will be some political uncertainties and that will have impact on the investor sentiment. These are really the three big things to keep in mind. At the same time, the valuations have come down but not to the extent where we can call it value at this point in time.

    On FIIs’ sentiment towards India and politics-related volatility

    There’s a combination of various factors. From the foreign investors’ point of view, India has always been a long-term structural story and we believe that there are very strong building blocks that will take the GDP growth forward at a more sustainable level over the next few years.

    But at this point in time, the foreigners are still a bit concerned on the valuation front. Among all the major emerging markets like China, Brazil, Korea, Taiwan, etc, India stands out as perhaps the only major emerging market which is still trading at above its historical average PE multiple. All others are trading below their average multiples. So, valuation is a key concern for foreign investors. So long as we continue to have strong domestic equity inflows, the valuation premium is likely going to remain.

    On the rising cost of capital in NBFCs and impact on investors

    The situation is definitely improving on the liquidity side over the last one, one-and-a-half months or so. We need to be worried about the second derivative impact rather than NBFCs’ defaulting. It is not really a big system-wide issue. There are a few NBFCs that might still have some problem but many other NBFCs will still be able to survive but at the cost of giving up growth.

    Some of these NBFCs will need to bring down growth quite a lot and to that extent, the segments or the industries that NBFCs lent in a meaningful way will probably have also to take in a much lower growth. Things will ease out on the liquidity front as we go ahead, but in the interim period, it will need to be contained with slightly lower growth at the broader economy level than what we have been used to.

    On India trading at PEs higher than historical averages and key takeaways

    The September quarter earnings season was not particularly exciting and the street and ourselves ended up cutting the earnings estimates at a pretty steep rate. On the positive side, we clearly saw that the NPL ratios for the banking system has been coming down and while the provisioning costs were up, it is still a welcome sort of higher costs because it gives greater visibility on reaching the final conclusion sooner rather than later.

    On the positive side, we saw the consumption trends being somewhat better, especially on the rural side and the low ticket item side. We also saw the IT hiring picking up to the highest level in last six to eight quarters. Those were the brighter spots but by and large the earnings season has been quite weak.

    Going forward into the second half, we will probably need to deal with the full impact of the liquidity issues and the higher cost of funding. But FY20 definitely looks like a better year because banks are a big segment of the index and the corporate banking issues seem to be close to be getting over or the NPL ratios are close to be peaking out. FY20 definitely should be a better year.

    On the prolonged weak housing cycle & whether we are at an inflection point

    We have been quite optimistic on the housing sector for a while but various external events have kept on postponing the housing recovery. First it was demonetisation, then the RERA implementation, GST implementation and now there are liquidity issues with the NBFC sector.

    But having said that, the housing affordability is at best levels since 2003. Ingredients are there but with the liquidity issues, the recovery got pushed out a little bit but is just a question of when and not if.

    But yes, I was much more positive on housing recovery about a couple of months ago but my sense is probably now we will need to wait for another couple of quarters.

    On early signs of capex revival and how to play that theme

    Very selectively. The segments where we are seeing the capacity utilisation inching up are steel, certain durables segment and some capacity improvement like autos. But the broad-based capex cycle recovery is still elusive at this point in time.

    Once again, the bottom of the capex cycle revival would be linked with the housing market bottoming out because housing is a big driver of economic growth and consumption for cement and other items. We clearly need the housing market to recover for the capex cycle to recover in my view.

    On themes Nandurkar is betting on for 2019

    I cannot talk about individual stocks, but at the sectoral level we feel that the currency is going to be in a depreciating mode and the domestic capex cycle revival will take some time.

    Our overweights are still the pharma and IT services sector. We quite like the domestic, especially the rural consumption story. There are plays on the rural consumption stories like tractor manufacturers and a few select FMCG companies. We also like from a long-term perspective.

    The property developers are also seeing the benefit of industry consolidation. While the market recovery itself might take time, the industry consolidation will help the listed property developers. That is the other segment that also we like. We are underweight on telecom, on materials including cement and also the NBFC space. In fact, we are going underweight on the financial sector as a whole.




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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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