The short-term movement of the market is hard to predict. But the market outlook is positive from a long-term perspective, says Gautam Chhaochharia, Head of India Research, UBS in an interview. Edited excerpts:
How comfortable are you with market valuations at this point?
We don’t think the market is cheap, but it’s not expensive either. We are comfortable with the current market valuation. The short term is always difficult to call, but from a one-year perspective, we are advising investors to be positive on India. If valuations don’t go up from current levels, earnings growth momentum should be enough for investors to get double-digit returns.
Unlike the last three years, we expect consensus earnings growth estimates of 15 per cent plus for FY16 and FY17 to be met. Our Nifty target for end-2015 is 9,600.
You have gone underweight on IT and neutral on pharma. But those are sectors that show consistent growth in revenue…
They have done well and they were our preferred sectors earlier. But one, their valuations are no longer attractive. Two, many investors were hiding in these sectors because they did not have other options. This is not the case any more. So you see sector rotation happening to cyclical sectors. Third, we think that growth surprise is behind us. We already saw in the last quarter how most companies failed to surprise or surprised negatively.
Growth is not picking up and inflation is on its way down. Is RBI right in keeping rates on hold?
We have always taken the view that the growth will be mild and gradual and not immediate and sharp. So the growth rate we are seeing in industrial production or general economic activity is not a negative surprise. We are still in a phase where both the RBI and the Government are running a tight monetary and fiscal policy to bring inflation down.
Corporate balance sheets are still in the process of getting repaired. We are not yet in a phase where growth begins to accelerate. The sentiment has changed, but economic recovery will happen only gradually.
On the inflation front, we continue to believe that inflation in the country is not structural. It has been high due to specific policy environment over the last three to four years. Those conditions have been withdrawn and inflation is coming down. We don’t expect RBI to lead with lowering interest rates. RBI will keep lagging the interest rate-inflation trajectory.
What is your view on bond yields?
RBI needs to stay and talk hawkish because they want inflation expectation to come down. We keep telling investors to keep looking at the inflation data and actual rates of interest rather than RBI rate cuts. We are already seeing inflation come off sharply, and 10-year yields come down 40-50 basis points.
We see 10-year yields coming down to 6.5 per cent by March 2016.
Our base case is that RBI cuts rates towards the end of FY15, that is, the first quarter of next year. We will not be surprised if they cut earlier than that.
You are expecting growth in rural income to slow down. Which sectors are likely to be affected by that?
Consumer staples and two-wheelers are the sectors that can be affected by this slowdown.
What is your view on power sector?
The investing time frame matters to a great extent in the power sector. Because, the problems in the power sector are resolving but it will take more time, it cannot resolve overnight.
We have seen some concerns resolving over the last year, but it will take another year to year-and-a-half before we see more clarity in this sector.
This sector does look exciting from a long-term perspective but for the near-term, we are sticking to the defensive power stocks such as Power Grid.