‘Major Correction Unlikely to Happen in Near Term’
There is a definite confidence among investors that earnings growth will come any time which is what is pushing up valuations, said Raamdeo Agrawal, joint managing director, Motilal Oswal Financial Services. Private banks, NBFCs, housing finance, oil, consumer and auto companies are going to do well in coming quarters, he said in an interview with Rajesh Mascarenhas. Edited excerpts:
Can the market sustain these highs despite weak earnings? Though the Indian market is fairly valued, a major correction is unlikely to happen in near term until there are excesses like in 2008 or 1995. Correction is required for a healthy trend, but currently there is a bullish atmosphere everywhere. Optimism is at its peak, foreign and domestic fund flows are very good, some of the leaders of the sectors are doing very well. I think this trend will continue for some more time. There is a definite confidence among investors that earnings growth will come any time. This is what is pushing the valuations. Market always has the tendency to discount the stock prices first and then earnings follow, which is very logical.
Many participants believe It is not attractive valuations but it is abundant liquidity which is taking markets higher. Do you agree? True, to a certain extent. This kind of flow comes once in a while but will remain at least for five years if you refer to history. There was a solid correction after every five years of bull run like 1985, 1992, 2000, 2008. All these rallies started for a right reason, but ended miserably. The current rally which started in September 2013 is yet to complete five years. We are in the excess zone but not excess to excess zone. Once it becomes excess of excess, one should be cautious. There is a huge pile of cash in the system waiting to be deployed, that will act as a shock absorber at every weakness. Barring any global event, the outlook is positive.
When do you think earnings growth will be back? Earnings picked up last year, but demonetisation pushed back India Inc’s earnings recovery few quarters. Again GST implementation has distorted the earnings recovery. Now, the government should give enough time for the companies to cope with these changes without making any further policy deviations. The good thing about GST is that consumers are not disturbed, but only backend, suppliers, supply chain, book entries have been affected. GST rollout has been far smoother than expected. I hope one year is good enough for all companies to cope with these changes and show the results.
Which are the sectors that will lead the bounceback? Earrings recovery should come from infrastructure space especially companies like L&T. Their order book must balloon. So far, only the government is spending as there is no demand. The moment demand picks up, private sector will also go for capex overnight. Currently, there is a pain in the system because of demonetisation and GST. This is where exactly lower interest rate is important.
Which are the sectors you are bullish on? The whole economy is running on the banking system. So, private banks, finance companies and housing finance companies will continue to do well. NBFCs have a huge potential in a growing economy like India. Banks wont’s go beyond their branches. It’s NBFCs who do the business. Housing finance companies would be more exciting though they will not give the return what they gave in last 10 years but they will outperform. Oil, consumer and automobile companies are also going to do well in near term. Pharma stocks look promising at the current valuations. There are some challenges but that sector should recover fast.
What should retail investors do? Investors should not focus too much on timing the market. If you ask me for the next 12 months, I would not expect a return more than 15% which is a long-term average. The current market is a warm market; it doesn’t mean there are no excesses. About 10-20% correction is possible and will happen any time. Equity market must correct and go up. In equity markets, downturns are temporary but upsides are permanent. Currently, there are no across-theboard ideas. We have to find one or two ideas from different sectors.
How significant this week’s rate cut from the market standpoint? We need one or two percent lower interest rate from the current level. It will give also a psychological boost to corporates that RBI is also with us.