‘Ma­jor Cor­rec­tion Un­likely to Hap­pen in Near Term’

The Economic Times - - Money -

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.

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