Joseph Thomas of Emkay believes we should not over-emphasise their importance as the market is based on economic fundamentals and not events that unfold from time to time
The rupee's depreciation is definitely good for the IT sector as it is one sector that has significant foreign currency receivables.
Going by this logic, IT stocks should still be a part of investors' portfolios, believes Joseph Thomas, Head - Research at Emkay Wealth Management.
In an interview with Moneycontrol's Sunil Shankar Matkar, Thomas talks about his take on the market, what he expects from 2019, his outlook for next year's general elections and much more.
Edited excerpts...
Q: The Nifty has gained more than 850 points as crude oil has fallen and rupee has recovered. Do you expect the momentum to continue in the backdrop of the ongoing election?
A: The fall in oil prices and the stability in the rupee exchange rate are factors that are of consequence to the domestic equity market. This is basically due to the fact that both these have consequences for the domestic price level or inflation, and therefore, for interest rates.
The moderation in these two variables will definitely be of support to the economy. But that alone will not be sufficient as we need to see expansion in GDP and earnings for sustained market movement upwards.
Elections are important in a democratic set-up, but we should not overemphasise the importance as the market is based on economic fundamentals and not events that unfold from time to time. They may have only a transient impact on the markets.
Q: What is your analysis on the influence of the state elections on the general elections 2019 and in turn, the stock market?
A: The state elections, in general, are fought on local issues which are of greater relevance to the state or the regions. The results would reflect the response of the electorate to such immediate issues, and largely local issues.
But the federal elections are fought on broader issues relevant to the nation as a whole. But the interesting thing is that most of the state elections which are being held now are in states which are presently governed by the ruling party at the Centre. Therefore, we need to see whether any pattern emerges in the electoral response from the states which would likely reflect the mood of the electorate for the 2019 general elections, which again is barely three to four months away.
As mentioned earlier, elections may have only a passing influence on markets as markets are more concerned about a larger continuity of economic policies.
Q: Which sectors would you allocate your money in current market conditions?
A: Going forward, banks expect better margin performance led by improving credit growth, lower NPA formation and lagged asset repricing. Asset quality trend was positive, as most banks reported lower GNPA ratios led by lower corporate slippages.
Retail asset quality has held up well and banks do not expect any deterioration barring continued concern on LAP portfolio. Credit growth outlook for banks has improved, underlined by healthy core retail growth and recent liquidity squeeze in NBFCs providing another leg to the growth. We prefer private banks.
The momentum in discretionary and staples still remain strong. Select pharma and tech will continue to remain well bid. In pharma, we see cyclical pricing pressure abating which should give companies time to restructure costs as well as reorient business models.
Q: How do you expect the consumption story to play out in light of the slowdown in lending to NBFCs following the IL&FS debt crisis?
A: The issue is actually two-fold, the failure of IL&FS to honour its debt servicing commitments impacted the markets, and at the same time, the liquidity in the interbank markets has been in the deficit zone to the tune of Rs 80,000 crore which is reflective of the persistent liquidity crunch.
RBI has made good the deficit by injecting liquidity through repos and OMOs. Lending to NBFCs will be impacted as there is still no comprehensive information on the asset-liability mismatches which many NBFCs have built up over the years and which may put pressure on these entities in the coming days. Therefore, lenders will be more cautious.
The impact of this liquidity condition is on fresh lending to the retail segment by relatively smaller entities. The larger entities who are capable of mobilising fresh funds and have risk control mechanisms will become stronger and would take up more market share. There are no significant consequences for the consumption story at this juncture.
Q: Do you think the rally in technology stocks is done with the rupee recovering or you would still want to have IT stocks in your portfolio?
A: IT performance is closely linked to the US economic prospects as well, as the US is still the major territory for IT sector projects. So the continuing economic expansion in the US will support IT.
The rupee depreciation is definitely good for the sector as it is one sector which has significant foreign currency receivables. Therefore, IT would still be a part of the portfolio.
Coming to the performance of the sector, the Q2 earnings for the sector on an aggregate was either in line with estimates or even better in many cases. The demand environment and the incremental deal pipeline should support continued performance.
Q: How do you look at the financial space after the quarterly earnings?
A: The banking sector is demonstrating a revival in credit growth, driven by share gains of private banks, which has also been aided by the emergence of issues and problems in the NBFC space.
In the NBFC space, one needs to be cautious until there is clarity over liquidity positioning for the system as a whole as well as weakening demand and rising risk of defaults, especially for the HFCs.
Q: In the last one month, all sectoral indices ended on a strong note, but metals underperformed. What is your view on metals space?
A: The metals saw some underperformance mainly on account of the economic slowdown in China, the tariff war between China and the US, and the rising US interest rates and rising bond yields.
The growth in China is expected to slow from 6.60 percent to the 6.30 percent according to the forecast by international agencies, and this is gradually impacting the demand for metals.
Metals and mining companies have broadly performed well in Q2FY19. Operating performance of the ferrous companies has been better than expectations for the second consecutive quarter due to higher realisations and better spreads. Mining companies remain a mixed bag.
Among the non- ferrous companies, aluminium segment did well, while, zinc segment faltered on the back of LME price movement. We expect steel companies to perform well going ahead backed by stronger prices due to improved demand and China's capacity curtailment. Non-ferrous metals are likely to remain under pressure and would be more dependent on global macro outlook.Assembly Elections 2018: Read the latest news, views and analysis here
