Good retail inflow, corporate earnings revival and a stable government will ensure that Nifty continues in its valuation range of 17.5-21.5 times one year forward earnings.
If sentiment does not improve, there is enough room for 6-8 percent further correction. Some of the factors that can turn the sentiments are the speedy resolution of some of the corporate stress cases and a sharp rate cut by RBI.
Q: Is the Budget fully priced in or surcharge on super rich, liquidity concerns, etc. are still dampening sentiment?
A: The Budget has adequately handled the liquidity concern prevailing in the economy and its positive impact would be seen in the coming 4-5 months. However, the budget has aggravated the already prevailing negative sentiment amongst the business and industries. Most of the large high net-worth individuals are already facing trouble due to tightness in the real estate market.
Also what has immediately triggered the downtick is the impact of the increased surcharge on foreign portfolio investors that should have been avoided. Good retail inflow, corporate earnings revival and a stable government will ensure that Nifty continues in its valuation range of 17.5-21.5 times one year forward earnings. But the range implies that if sentiment does not improve, there is enough room for 6-8 percent further correction.
Q: Is there any key factor that can turn market sentiment?
A: Post IL&FS crisis last year, series of corporate stress situations have come up severely damaging the business and investing climate. Within the larger economic and market cycle, there are various sub-cycles that keep playing out like credit cycle, interest rate cycle, liquidity cycle, asset price cycle, demand cycle, inflation cycle, wage growth cycle, etc.
These cycles when they turn down they take their own time to reverse. For example, auto cycle whenever has turned down has taken about 18 months to turn up. Some of the factors that can turn the sentiments are the speedy resolution of some of the corporate stress cases and a sharp rate cut by RBI.
Q: What is your take on smaller banking and financials entities?
A: Smaller banks are having a challenging time. These smaller private sector banks never had large corporate exposure so they nicely navigated the corporate NPL cycle during 2014-18 but now their moat of regional focus and SME and retail financing are seeing sharp pricing pressure from various NBFCs.
Also as larger better managed private sector banks are increasing presence in every part of the country, these smaller private sector banks are losing their uniqueness in their regional geography. As loan book is not growing at the rate at which they were growing before, that is making their non-performing asset looks higher as the percentage of the loan book.
Q: Do you think bad loan concern is close to an end after June quarter earnings?
A: NPL as a percentage of total loan book has already peaked a few quarters back. Most of the larger banks both among public sector and private sector have aggressively recognised their stressed assets and have made sufficient provisioning.
So in system-wide sense, NPL as an overall percentage to loan book will remain lower than its peak value. But, what has changed during Q1FY19 results is that smaller banks and NBFCs that were not affected by NPL are now finding themselves in this mess.
Q: Do you think FMCG as a sector could be a buy now or the worst is yet to end?
A: The volume growth of FMCG companies are coming in a mid-single-digit. Dabur reporting high single-digit is a bit of an exception primarily due to its initiatives like investment behind power brands, expanding the distribution footprint and streamlining of the supply chain.
Right now as things stand, FMCG would surely have under performed if the overall market was in bull mode but as the overall market is in an uncertain phase, FMCG stocks would remain in demand due to its characteristic of lower beta.
MORE WILL UPDATE SOON!!
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