‘Correction is likely to last for a considerable time’

The markets have not been able to cling on to higher levels despite the government’s efforts to stem the rupee’s slide and find a resolution of the crisis at IL&FS. DEEPAK RAMACHANDRA, head of sales, India Equities, Bank of America Merrill Lynch, tells Pu

The fall from the peak levels has been quite sharp. From a year’s perspective, are these losses recoverable?

The losses have been sharp — perhaps sharper than what most people anticipated. But the sell- offs are always like that. My personal view is that these losses are not recoverable over a year’s time. One needs to understand the important events that can impact the markets over the next one year. Besides global factors, elections in India — state and general — are key. State elections (in November-December) are crucial and the outcome will give us important cues/indicators leading up to the general election scheduled in May 2019. In the light of these uncertainties, it is hard to expect the markets to recover all these losses. We expect the Nifty50 index at 9,200 levels a year from now. Our December 2018 S&P BSE Sensex forecast is 32,000.

Are the valuations compelling enough to start cherry picking?

It is quite tempting to start cherry

picking given the sharp drop in select stocks. It’s not just the large-caps, but the mid-caps, too, have been beaten down badly. Though the levels are tempting, one should wait for now. The headline valuation of the market has come off meaningfully. We are down from 19x (peak levels) to around 16.5x now. The average has been close to 15.5x. While the valuations are nearing long-term average, on a relative basis, India’s premium to the rest of emerging markets (EMs) is still elevated. Valuation of mid-caps is still at a significant premium to the largecaps. While headline valuations are not compelling enough, within sectors there are a few opportunities.

Would you blame the recent fall more on the fear creeping in or is there genuinely something wrong with the fundamentals?

What happened in the non-bank finance company (NBFC) space was triggered by the developments at IL&FS and led to an element of fear. The correction in NBFCs was sharp because the valuations were exorbitant — some NBFCs were trading at 5x book and 30x earnings. The domestic and foreign money was sitting in just a handful of NBFC stocks and as the panic spread, investors unwound their positions.

How long do you think this phase of market correction will last?

The correction is likely to last for a considerable time. That’s because we still haven’t seen any real panic from institutional investors. While FPIs have sold, it is still not a panic-like situation. Some of the tourist money may have gone out of the system, but the large long-term players are still invested. Once we see a panic set in from their side due to some reason — domestic or any external factor, that’s when we can say the correction will come to an end. It is too soon to say that when or whether the panic will set in. Once the redemptions begin in the mutual funds, that’s when the real panic will set in and the market bottom will be in sight.

Are FPIs looking to get in at some point?

This is difficult to predict. The pain in the equities is just beginning to set in now. The FPI money will not come into India in any meaningful way till June 2019. Globally, there have been outflows from equities as an asset class and this is not stopping anytime soon. There will be a shift to safer havens. With the US Federal Reserve continuing to tighten, the debt flows and flows into EMs will also be impacted. There is generally a risk-off phase among investors and they now prefer to stay away from EMs. These are difficult times for asset managers; they are finding it tough to find avenues to deploy money. What does this then mean for earnings over the next few quarters? Corporate earnings will get reset. We had a great tailwind for 18 months. Street estimates are still elevated and we expect downgrades to accelerate. Our expectation is for a 12 per cent earnings increase for the S&P BSE Sensex. The Street, however, still expects this to be around 16-17 per cent mark. If our thesis on oil and the rupee plays out, there will be downgrades in what the street is expecting.

ONE NEEDS TO UNDERSTAND THE IMPORTANT EVENTS THAT CAN IMPACT THE MARKETS OVER THE NEXT ONE YEAR… GLOBAL FACTORS, ELECTIONS IN INDIA. SO, IT IS HARD TO EXPECT THE MARKETS TO RECOVER ALL THESE LOSSES. WE EXPECT THE NIFTY50 INDEXAT 9,200 LEVELS AYEAR FROM NOW. OUR DECEMBER 2018 S&P BSE SENSEX FORECAST IS 32,000