After the election-related initial spurt, the market would be running out of near-term triggers and the focus would be back on economic reality which was not looking great, said Mahesh Nandurkar, India Strategist at CLSA.
Some of the near-term events to watch out for will be the appointment of the new finance minister and the budget. “However, given the fact that we are looking at a continuing government and have already seen the interim budget, there won’t be too many changes as such,” Nandurkar told CNBC-TV18 in an exclusive interview.
Excerpts: I was reading your strategy note after the exit polls that this could take the Nifty towards 12,000. However, what after that, if actual results are in-line with exit polls, at 12,000 what should be a good strategy on the market?
I believe that after the initial spurt which will probably be election-related, and assuming that the exit polls turn out to be reality tomorrow, my sense is that we will probably be running out of near-term triggers. Possibly some of the near-term events to watch out for will be who becomes the finance minister and what kind of budget. However, given the fact that we are looking at a continuing government and have already seen the interim budget, there won’t be too many changes as such.
So the focus will be back on the earnings and on the global developments like crude oil price and US-China trade tensions. Some of the more near-term issues will be credit-related problems of the non-banking financial companies and consumption slowdown. So we would be back to testing the economic reality which is not looking that great at this point in time.
Also, the valuations are on a higher side and we have already expanded our premium over the other emerging markets, the Asian markets and China over the last one week. So beyond the election-related boost, we will probably be looking at a muted returns.
We saw a monster rally in anticipation of a stable government. But has that taken valuations beyond your comfort zone? Are you a buyer even at current levels?
I still do expect that the flows from the foreigner side have not fully accounted for the possible stable government. So, I would still expect some more amount of foreign institutional buying. I am also expecting that the falling trend in the domestic equity mutual fund inflows, which we have been seeing for the last seven to eight months, should probably reverse and we should start seeing some improvement on the domestic flows as well.
So, yes, the valuations are definitely getting into a not-so comfortable zone, but my sense is that there would be some flows from the foreigner side and improved flows from the domestic retailer side that should support the valuations. I would probably be on the positive side at this point in time, but I would not be expecting a 15 percent return over the next 12 months, I would moderate it down towards maybe say 8-10 percent kind of a number.
I do not know if you saw Akash Prakash’s article yesterday in the Business Standard. He was raising a couple of things. One is that the NBFCs are still not in a position to lend. He was pointing out to promoters. One deleveraging was over by the big promoters, but a large number of them were depending on either NBFCs or mutual funds for loans via loan against shares. That is not available. The conclusion of that piece, which is convincingly argued, is that India Inc does not have enough appetite or money to invest. It was arguing for a slowdown. Does that convince you?
Obviously there is merit in that argument. Yes, I am not too optimistic about the government investment picking up from the current levels as the government has already been investing in infrastructure and other things to the possible levels. Also, the corporate capex cycle has shown some signs of improvement in some select industries, but we cannot expect massive improvement from that side as well. I am still hopeful, despite what we have seen in the NBFC space, that the housing market and the household investments will probably start to improve and that is what still makes me optimistic on the broader economic outlook.
I think the one delta that we can still expect is the household sector investments, mostly on the property side. However, if that does not happen, then I think we will have to be contend with the current slower rate of gross domestic product growth.
Coming back to the election trigger, what does all of this mean for the foreign flows? If the BJP gets 270 plus seats as exit polls indicate, this will be the first time after 1971 that an incumbent with a clear majority gets voted back with a majority. What does that mean for foreign investors and flows into the Indian markets?
Flows into the Indian market will be a function of two things. One is obviously what is happening with the broader emerging market sentiment and secondly what is happening in India. So the first part is not looking all that attractive. We have already seen the MSCI emerging market or Asian market or the Chinese markets declining by almost 10 percent or so from the recent peaks that we saw in late April and early May. So that part is not really all that conducive, especially if you believe that the trade tensions between US and China are unlikely to deescalate in the near term. We are also looking at a possibility of oil prices going up.
So, from that perspective, it is not really very conducive for the flows. However, the India specific developments, as you mentioned, will definitely mean that on a relative basis, India looks much better and there is every chance I would say that India actually ends up outperforming the other Asian peers and the emerging market peers.
So, basically putting these two things together and if you see that over the last couple of days, we have seen about $300-350 million of net FII inflow, that is actually a very small number in the context of outflows that we have seen more recently and also in the context of what can possibly come India’s way. On a relative basis as we have been highlighting, the foreigners’ ownership of Indian markets is perhaps close to its low levels, all-time low levels that we have seen in the last five years. So, I do see some possibility of India weight going up. So, as I said, I still do expect some incremental foreign flows to come through.However, as I said, that will have a negative bearing on the other global developments and the net conclusion is I would still be looking at a single digit market return beyond the election rally.