Neelkanth Mishra, Managing Director and India Equity Strategist at Credit Suisse expects downgrades in earnings expectations to reduce hereon but outflows from foreign institutional investors to continue if oil prices remain at lower levels or fall further.
In the current scenario, he prefers select domestic economy-focussed sectors and is most bullish on consumption-driven companies as the later will benefit from the Seventh Pay Commission. However, this doesn’t mean the foreign brokerage firm dislikes the global exposed sectors or companies.
Why do you expect cuts in earnings to slow down going ahead?
This is because the extent of commodity price decline that we saw in 2015 cannot be repeated in 2016 physically. Oil prices cannot fall $50 from here, steel prices cannot fall $200 a tonne from here, aluminium prices cannot fall $500 from here, and so on.
Secondly, relative weight of globally exposed companies has actually reduced because the domestic focussed companies continued to see earnings growth and their market cap increased. Lastly, the downstream impact of government spending on roads and railways will most probably be felt from next year. And in the second half of FY17, the Pay Commission impact will start flowing through, which can act as very strong broad-based stimulus.
In 2016, consensus view on 12-month forward earnings is 19 per cent compared to our expectation of 13-14 per cent.
Why have you said that 2015 FII outflows may continue? Is that related to the Fed rate hikes?
It has got nothing to do with the Fed rate hikes. What is happening now is the reverse of what happened in 2011-2013. The Indian economy was slowing down quite sharply and FII flows remained quite strong then. Partly this was related to the oil exporting countries’ surpluses as the crude oil shot from $25-30 to $100-110.
With the fall in the oil prices, current account surpluses of many have disappeared. All the rainy day funds that they had created through sovereign wealth funds were forced to sell off. As long as oil prices stay below $60, the funds that they invested in will keep seeing redemption requests. If prices stay below $40 or 45, that number will be actually much higher.
You don’t give Sensex or Nifty targets; but any indication on how will Indian markets do in 2016?
India’s relative price to earnings multiple to MSCI world is quite low. So I don’t expect India’s PE multiples to compress. Given that and my expectation of 13-14 per cent earnings growth, the market should also give 13-14 per cent return. If global PE multiples expand, returns could be higher than 13-14 per cent and vice versa.
Having said that India’s premium to the world should not change. It should go up, and it should definitely not fall because growth differentials are quite high. India’s relative PE is almost at a decade low level.
Mid-caps have done well than large-caps in 2015. What is your thought on the valuation?
Price-to-earnings multiple of many mid-cap companies are very high because they have not seen so much selling pressure. The next 400 (excluding the large 100 companies in the BSE 500) have done well not only because of more domestic exposure but also because of low FII holdings. So, selling pressure has been higher in large-cap stocks.
What are your sectoral preferences and what sectors you don’t like?
We are overweight on consumer staples, discretionary and information technology sectors. Despite high valuation, we like consumer staples and discretionary as these sectors will additionally benefit from the Seventh Pay Commission.
We expect IT companies to report 12-14 per cent growth in earnings in dollar terms. The market is being too pessimistic on their growth prospects. Also the companies’ price-to-earnings multiples are much lower than the past. We are underweight on financials due to asset quality issues though we like NBFCs and private sector banks with retail focus. We are also underweight on materials (global oversupply on metals), industrials (capex cycle on power still years away) and telecom (competitive pressures).
What are your top stock picks and avoids in these sectors?
Tech Mahindra, Hindustan Unilever, UltraTech Cement and Tata Motors are our top picks. We recommend to sell SBI and Bharti Airtel.
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