Nifty target is still 10,500 for Dec 2018: Gautam Chhaochharia

The target, in a way, reflects the broader market view rather than specifically the Nifty index to that extent, Gautam Chhaochharia, ED & Head of 65588457 65587127 65589816 India Research, UBS, tells ET Now.Edited excerpts: In June-July, the general view on the Street was this is it for Indian markets for 2018. Macro concerns were back and valuations were not attractive. But what a comeback it has been. Forget about 10,000, we are almost at 12,000 now.Absolutely. Clearly what has happened globally has also helped India to some extent, given the uncertainty around the global macro. India is again coming out as a safe haven while the environment for liquidity is still benign globally. So, that has helped India. Also, the domestic flows remain strong and have been a big support for the markets. Why is India outperforming global markets? Many of the macro concerns which are there for other emerging markets, are there for India also -- whether it is uptick in crude or concerns on fiscal deficit or low growth in certain key pockets. The extent of impact from the global macro factors on other emerging markets is much starker as we have already seen this year. It is reflected very well in the currency moves which have been sharper than what we have seen in the Indian rupee. Secondly, all these global macro factors are a stress point for India but they are at best a marginal stress point. India is nowhere near 2012-13 when it was being counted as one of the fragile five. And it is more than structural. It is not just about cyclical currency conditions but structurally also it is nowhere near that because oil as a percentage of GDP, gold as a percentage of GDP are much lower now. These are marginal stress points where current account deficit moves towards 2.5% and 3% in worst-case scenario. These are really still not going to be a big stress for finance. It is a marginal stress. Compared to other emerging economies which have seen bigger impact from global macro including currency moves and outflows from emerging market funds, India clearly stands stood out better. In the first half of the year, emerging markets saw record inflows and India did not get any fund flows. Even in terms of positioning, India’s positioning had become lighter for foreign investors and obviously the long-term story for India still looks one of the best out there globally. You were talking about currency. Pharma and IT have been two beneficiaries. We were just culling out the data on how some of the MNC pharma stocks have performed. If I just look at the August returns, GSK Pharma is up 14.5%, Merck is up 38%, Sanofi up 9%, Pfizer 39%, Novartis India 42 odd per cent. Do you think there is a strong case to nibble into some of the MNC pharma names as well?We do not have coverage of any of the MNC pharma names. So, there are no stock specific views as such. In general, as a strategist I will say is that the flight towards MNC pharma names would also be part of the flight towards visible quality, safe growth. We have seen that clearly play out this year. It has been a tale of almost two markets where part of the market has been doing well but a larger part is struggling. Reports on the Street are indicating that with Q1 data looking encouraging, things may pick up for FY19 to bring out an earnings number which the market desperately needs at these levels. In the backdrop of an impending big election result, how much do you think the market can move up from here? Markets can continue to move higher as long as local flows are strong and supportive, but we see earnings improving from single digit to 12-13% growth but not 20% plus growth which the markets are hoping and expecting and even pricing in. Very simplistically, earnings are growing towards a normalised trend from a low base of demonetisation and GST. But if you look at GDP forecast for FY19-20, they are not very different from where India was growing pre-demonetisation. So, from a macro perspective, we are going back to that pre-DeMo trend. We are not really looking at 8% growth in hurry in the next couple of years. In that context, 20% plus earnings growth can happen only if we get a big write backs in the financial services because they are a big part of the market. Even from same framework, if you look at Q1 earnings and analyse that number across companies and sectors beyond the headline YoY number which optically looks good for many companies because of the low base. If you look at two-year CAGR or compounding return, it is not that exciting. It is in single digits. Even for Q1, the two-year CAGR is in single digits.What is your take on power NPAs? Power secretary Mr Bhalla pointed out that this is an issue that needs to be resolved sooner rather than later. There is a time limit and we need to put a hard stop to ensure that the mess is settled. Absolutely and the quicker it happens it is better both for the financials as well as for the broader economy because otherwise it becomes an overhang on the entire economy in terms of returns on assets. Even if we have to take haircuts, moving on is the best option. Rule of business is when a sector is in distress, no large capacity addition would happen. So, no fresh capacity will clearly come back to power. Going by past experience, I do not think NCLT cases would be solved that easily. The existing players -- NTPC or JSW Energy -- could make money hand over fist. After corporate banks, can power utilities be the next go-to bet on cyclical recovery? There are two models out there in the power utilities segment. One is assured return, linked to asset creation and then the merchant power driven model. So, in the asset-linked return model, even if we see NCLT cases getting resolved and those assets landing in the incumbents’ books, that would be higher growth than what is being built in by the market. So, that could be a positive surprise or even blessing in disguise for the incumbent utilities.On the merchant power driven model, the power secretary said that the short-term spike in merchant tariffs is largely reflective of the coal shortages rather than any signal or indication of demand-supply imbalance. If you look at the power capacities out there right now, the utilisation levels and the capacities coming up are already happening.A scenario where India faces power shortages like it did in the last decade is not going to happen for the next few years. We would not be recommending playing the merchant power story as a way for a cyclical play on power utilities, similar to banks. But yes, if the incumbents are able to get more assets at the right price from the NCLT process, that would be an add-on to the growth and those names could do well. Beside power, where do you think there is a contra opportunity right now because IT and pharma are well discovered themes by now. Some banks clearly and specifically corporate banks. If you look at some of the valuations of the leading corporate facing banks and specifically those with retail franchise, a lot more money can be made in those stocks. Corporate private banks with retail franchise still appear to be very appealing space to be in. Are you tempted to revisit your Sensex and Nifty targets for this year because markets clearly are trading above the fair value zone for everyone? My Nifty target is still 10,500 for December 2018. The reason we have not changed that is because the Nifty target for us is a way of reflecting the broader market view. We have seen the Nifty do well this year for a very narrow specific set of stocks. There has been a tale of two markets even within Nifty. Forget broader markets, even large caps and midcaps. Our target, in a way, reflects the broader market view rather than specifically the Nifty index to that extent. As your Nifty target is lower than what the current market level is, do you expect markets to come down between now and December? Yes, in terms of fair value that potential remains absolutely.

from The Economic Times https://ift.tt/2NrAwsV
via IFTTT