How will the market perform in 2018? Experts weigh in

While the market looks to steady itself after 10 percent fall from its record highs, several market voices believe that the year could face some volatility, especially in the wake of elections. Having said that, having a stock-specific approach could also be fruitful.

That is the word coming in from several market voices who participated in the panel discussion organised by Prabhudas Lilladher, where the topics ranged from domestic and global market outlook as well as views on a sectoral basis.

Here is the transcript of the panel discussion:

- Participants:

1. Mr. Sunil Singhania (Ex-Global Head Equities – Reliance Capital)

2. Mr. Jeetendra Punjabi (earlier Global Strategist with Capital International Group & Founder, EM Advisors)

3. Mr. Arnob Mondal (Chief Investor Relations Officer, Larsen and Toubro )

4. Mr. Akshay Gupta (Group Exec Head Indiabulls & CEO Asset Management)

5. Mr. Dilip Bhat (Jt MD, Prabhudas Lilladher)

6. Ms. Amisha Vora (Jt MD, Prabhudas Lilladher)

7. Mr. Ajay Bodke (CEO & Chief Portfolio Manager, PL PMS)

- Moderator:

o Mr. R Sreesankar (Co-Head of Equities, Prabhudas Lilladher)

- Moderator: Mr. R Sreesankar

- Good evening, everyone, once again. Let me take the first question to you, Mr. Mondal. Last two years we have seen infrastructure as a theme but we see a lack of investment through the private sector capital formation. Where do you think that earnings growth and momentum will come in?

- Mr. Arnab Mondal – Chief Investor Relations Officer, L&T

- You are right, the last couple of years have been predominantly private sector as far as infrastructure is concerned, the private sector has been very lackluster, barring 2maybe some episodic investments. I think one misconception is that it is only the central government, it is not so. Funding is being from four broad sources, one is central government. State governments have also increased their funding because they after the financial commission implementation have much more money in their hands, thirdly cash rich PSUs who have been hoarding cash for a very long time are also choosing to spend rather than giving back by way of an extraordinary dividend to the government. And finally what does not go, what is not so well reported is significant amount of money that comes in from bilateral and multilateral agencies Jayka or World Bank, PDP. But as you correctly said it is predominantly public sector.

- Moderator: Jeetu, in your thought process on President Trump is making a lot of statements, what do you think will happen to the global commodity side or the currency ?

- Mr. Jeetendra Panjabi

- So you know on the rhetoric between US and China, especially Trump in my view is noise. US is basically gearing up for the next election from a Trump perspective. I would guarantee this a year from now and look at the trade deficit between US and China, it would be wider and not narrower. You see the kind of stuff and we can see that in the monthly data as well. US’s monthly trade deficit is expanding not contracting. The data is telling the real picture and the data for me is telling me that I don’t think anything is going to change.

- Moderator: Right, next. Sunil, on the domestic side , what do you think the profit growth is going to be say three years from now. What are going to be the key segments which are going to lead the profit growth?

- Mr. Sunil Singhania

- By nature at least I am an optimist . if you just go back in history in 2001 when there was recession globally and you had even in India companies struggling with the same issues, you know the stakes were very high and there was no movement in as far as local economy is concerned. And then when the economy started to fire we had profit growth rates of 38% and 28% and 30% three consecutive years then for the last four five years except a couple of sectors, profit growth has been marginal. Having said that I think as I mentioned earlier I think 2017 you have had metals which started to do very well like by restriction on production on a wide variety of not only metals but chemicals and a lot of other products which has led to significant increase in profitability. Corporate balance sheets are very strong. And consumer spending has been very strong. So whether you take two wheelers, four wheelers, even some of the consumer staples and the consumer non-durable sales, you know, we are about record AC sales and so on and so forth. So you have metals, you have a big portion of consumers, pharma is already bottomed out and from here on at least we believe that there should be good 15% growth there. So I think on IT also 8-10% growth looks likely, there might be a positive surprise because US and other economies are doing well. So the only segment which is left basically is the banking and financial services segment and there also the retail bank is doing well, but the profit over there is being dragged down by corporate banks because of these NPA issues and that also is looking like you know plateauing or coming close to its…and from here on you can only increase. So I would say that few large sectors of the banks might be the swing but a lot of other sectors will keep on contributing bits and pieces. You will have like three to four times increase in corporate profitability that is possible over 6-7 years.

- Moderator: Last two years probably it had been a wonderful period for midcaps and small caps- do you think this story is here to play out yet again or having seen the big correction, sharp correction etc. that it’s going to be a bit on the lower side going forward.

- Ms. Amisha Vora, Prabhudas Lilladher

- …I think particularly this year will be the year when a lot of sanity will come back. Some of the companies which are doing very well, I think their trajectory will continue to be exceedingly good. And there the valuation will still not continue to be the parameter. But in terms of larger universe the number of performing stock as compared to last year will substantially come down this year. But on midterm basis when we see next 3 years, I still think that the interest rate outlook is not very harsh, it is benign. The huge churn has been because of GST and rest of the reforms in favor of organized from unorganized will continue to make, midcap, small cap a very interesting play.

- Mr.Dilip Bhat

- I think one more perspective over here that a lot of these midcap companies now which are hitting through the new issues. I think in a lot of them there are some good amount of potential and also from the corporate governance angle. So, I think certain select portions of mid cap companies possibly would hold a good promise in the future.

- Moderator: Akshay, let me come to you. Earlier we used to always look what is FII flow. Last year one year we completely forgot FII flow we look at what is a DII flow. Have you seen a lot of pressure building up in the month of March itself or you think equity in flow is still going to continue.

- Mr. Akshay Gupta

- The opportunistic flow which used to come because of certain expected movements in the markets could dry out, we saw that in March. That may not come back because 2018 is going to be a tough year for the markets. Like Amisha said, I don’t think there is going to be a one way market for all sectors. So I think 2018 market being tough and which is now being validated by most commentators, the opportunistic stuff is not going to come into the markets. The behavioral stuff will continue, it may diminish a bit or there may be redemptions of those SIPs. But the SIP count will not come down. Now people have realized that over a period of 10-15-20 years equity markets do eventually outperform the fixed income real estate growth. So behaviorally they have become far more matured and small corrections don’t change that behavior so easily.

- Mr.Ajay Bodke: I would like to comment there. I think I would like to stick my neck out and be that this year would be quite good for the Indian equities and I think couple of charts that you presented if you look at the valuations I think we are not trading at exorbitantly high valuations. In fact as shown in the chart, if you look at the last 10 years average, I think one year forward Nifty is around 17.5 times and expected 19% growth in the earnings of FY19, on the back of 10% in FY18 we are taking it around 17, sort of 17.5 times we are taking, average is 17 times. But mind you this is bottom of the cycle of earnings, this is very important. What stage of earnings growth in the cycle that you are in also matters. And if you look at globally I think the turnaround in earnings growth started around 15 months to 18 months back and that’s why we are seeing the global engine firing quite strongly.

- In Indian context, as Sunil rightly mentioned I think we have had India specific issues. In my opinion a certain de-coupling if I could use that word in terms of earnings growth trajectory could develop. We could see a step up in earnings happening and maybe because of the, if the trade issues were to escalate and it would impact global trade and earnings, a certain moderation in global earnings is concerned would happen. So from that perspective I think I would sort of say be an optimist and say that the markets could surprise us the next time around when we meet out here and have a look back on the year gone by.

- Moderator: Jeetu, everybody says that today 2018, Sunil was mentioning there was no what you call unemployment right now in the US. The non-farm labor numbers are running so strong it is beating estimates every month that actually shows the strength of the US economy. People expect this strong economy should result in interest rate rises typically things are moving sideways. Do we see a risk of a 2019 slowdown if the US economy

- Mr. Jeetendra Panjabi

- The monetary aggregates of the last 18 months are slowing down and the economy is rocking. So it’s a complete divergence in the data and rates are irrelevant in my view. …But let me add one more point that the rest of the world is doing fantastic.

- I am super bullish on India. The reason is 2015 the world economy shrunk by 5 trillion dollars. It went from 78 trillion to 73 trillion dollars. the world goes through 7-8 years cycles right? The brand new cycle for the current cycle started in Feb 2016. In my view the high frequency data is saying we have moved from disequilibrium to equilibrium.

- Moderator: Mr. Mondal, you had a situation in the last time when the NPA scenario, the infrastructure started, a lot of unique projects were there. Most of these companies actually ended up with a problems. because of the government’s HAM model (Hybrid Annuity Model) etc. are things are different in this part of the cycle?

- Mr. Arnob Mondal – Chief Investor Relations Officer, L&T

- I think it is not going to be as difficult as it was the last time around. A lot of the projects carry a lot of risk based on a lot of underlying assumptions on things like traffic and base traffic particularly apart from investor risks and construction risks and stuff like that. And political risk as well. This time around because of the preponderance of the HAM model at least you have a liability based revenue model which removes a large part of the risk. So I don’t think that you landed up with severely over-leveraged developers as you had last time around essentially.

- Moderator: Jeetu, from mid-nineties one segment which has been synonymous with India’s growth story was IT. IT services etc. How do you see the industry actually moving forward?

- Mr. Jeetendra Panjabi

- You went through a period where two things were happening. One global demand was weak going into March 2016 or Feb 2016 which I was talking about earlier. And two there was a disruption through AI, automation and all the other things and all these companies felt the shock. And then you saw global demand pick up again worldwide. And you saw that a lot of these companies in US and Europe said oh we got short on our technology investments. We are going to scale that up. And we need to add AI to it. And you’ve seen demand come back broadly despite a lot of concerns and fears over there. But the disruption continues.

- AI is obviously disrupting but in the meanwhile growth is coming and you are going to work through. In my view we had a period where everybody converged to a business model that worked. Now we are in a period of divergence. The guys who are able to morph through the disruption into a new model will do well.

- Moderator: Sunil, on pharma, if you look at it last 2 years, from September 2015 onwards from a 32 times forward earning pharma all corrected big time…

- Mr. Sunil Singhania

- You know Pharma had its days of glory, years of glory as far as markets are concerned. I think last couple of years what we have seen is a lot of regulatory head winds. Particularly with respect to USFDA. And I think that is now almost coming to an end. At the same time the approval cycle in the US has shortened. So more and more companies are getting approvals. So this huge bounty of exclusive profits which the company used to get are not that large. Having said that I think the valuations have corrected quite meaningfully. And one segment of pharma which is I think very, very attractive is the domestic pharma.

- If you see the domestic pharma market it is growing at 15% which is more than the consumer staples. It is growing faster than the soaps and detergents and anything else compared to that. The ROEs are very, very strong. I think pharma is a sector, is a great sector.

- Moderator: Akshay - In the real estate space affordable was always a nice thing to speak about- Whether affordable housing is going to be a big successful story.

- Mr. Akshay Gupta – Group Executive Head Asset Management, Indiabulls

- Obviously every metro has its own affordability. Bombay affordable means less than 1 crore. In Chennai that would be 30 lakhs. In Hyderabad we would go with 25 lakhs. In Delhi it would be 40 lakhs. Bombay is a hyper expensive metro. So affordable basically is the segment that is selling today at high velocity. Anything above 1 crore in Bombay is a challenge. Anything above 50 lakhs in NCR is a challenge. The only sales velocity that is off the course is the sub one crore in Bombay, sub 50 lakhs NCR. So project equity you will make money. Because funds know how to build the builders and know how to control the leakages. Investing in listed real estate companies a definite no-no. Unless there is like somebody said there is a clear evidence of governance. But like in all other sectors, if the person is doing something different, that is the time you should look at investing in it both from a debt angle and an equity angle. In real estate it is more of commodity market right now. Like the banking and financial services I think it is a purely commodity market. Similarly on the real estate sector there is a lot of commoditization in real estate. And unless somebody has a very specific solution it doesn’t really make a lot of sense in investing in the listed equity.