‘Monsoon, rate cut will boost equities’

Avni Raja | Updated on January 20, 2018 Published on May 06, 2016

NILESH SHAH MD, Kotak Mutual Fund

The earnings scenario also looks positive, says Kotak MF’s Nilesh Shah

With global uncertainties rising over the US Fed’s rate hike trajectory, the Indian equity markets are likely to see a further correction this month. Speaking to Bloomberg TV India, Kotak Mutual Fund’s MD Nilesh Shah said there could be fresh developments like above normal monsoon, another RBI rate cut and an earnings turnaround that can support the market.

What’s your outlook for earnings and the markets?

Normally, we have seen that the first half of the results are good and the second half are generally bad. So we are entering a phase where from good results we will move to bad results. We are also going to see increased probability of the US Fed rate increases as the dollar weakens. So these two things combined can probably lead to a short-term pressure on the market, especially because it ran up 14 per cent plus from the bottom. But if this correction comes, it will be a great opportunity to buy.

So what’s your assessment about earnings so far?

The current earning seasons have been far below what we started the year at. The street was expecting 15 per cent plus earnings growth in FY16. The real numbers are coming in at 2-3 per cent. But what we need to analyse is the break-up of the earnings. There is a segment of commodities in the metal companies or in oil or steel, which has not been able to deliver profits as expected because commodity prices corrected. There is a segment of PSU banks which has started writing off NPAs and that’s why their profits are down. There is a segment of pharma companies which are taking a one-time hit because of US FDA related things. These are one-off events. They are not going to be repetitive in nature. If we look at the core earnings, it is still up 10 per cent. And that gives a positive sight. My feeling is that as we move towards FY17 and FY18, we have a platform for acceleration in earnings. One, interest rates are being cut and more importantly they are being transmitted. RBI is increasing liquidity. When you increase liquidity, trade and industry benefit. The government is spending money, which will ultimately circulate within the economy. Monsoon, which has been playing truant for the last two years, will be good this year with forecast of the Meteorological Department. So interest rates, liquidity, government spending and monsoon, put all this together, it creates potential for creating an improvement in earnings over FY17 and FY18.

When do you see the revenues picking up?

If you see the data published by RBI for more than 2,37,000 SMEs that are non-government and non-NBFC, their aggregate turnover in value terms is up 12 per cent in FY15. So there is unlisted India which is growing at 12 per cent plus, and there are listed companies which are not able to grow. My guess is that if unlisted India is able to grow at this pace, eventually it will get reflected into listed India.

What should be the investors’ approach as far as the equity markets are concerned?

I think you will get a good opportunity in the correction, which we should witness in May. Post May, there are events that will start supporting Indian equity markets. One is the monsoon. The market is expecting the RBI to release liquidity in the economy over 6-12 months. That’s also positive for the economy. The market is expecting lower rates. There will be one more rate cut eventually in calendar 2016. That, along with transmission, should result in lower borrowing costs. The market is also expecting earnings recovery through government spending, monsoon, lower interest rates and more liquidity.

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Published on May 06, 2016
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