Mkts not driven by local issues; stock-selection
key:BNP Paribas
Manishi Raychaudhuri of BNP Paribas
says unless more clarity emerges on this turmoil (China) and the earnings
scene, it will be difficult to predict the future
Markets across the region are not
being driven by country-specific factors, but by what is happening across the
region, particularly China, says Manishi Raychaudhuri of BNP Paribas. He says
even in China, while there are news about macroeconomic slowdown, the bigger
concern is the currency (yuan).
"I don't think anybody had
anticipated that the central bank — PBoC — would actually indulge in a daily
fix, which was successively lowered than the previous day's closing which
essentially indicated that they were indirectly guiding the currency down,
leading to a concern about a currency war across the region," he told
CNBC-TV18.
All these things led to pressure on
the market and a potential currency war always leads to a possibility of
further outflows from the region, he explains.
Raychaudhuri further adds unless
more clarity emerges on this turmoil and the earnings scene, it will be
difficult to predict the future.
Below is the transcript of Manishi Raychaudhuri's interview with CNBC-TV18's Sonia Shenoy and Anuj Singhal.
Anuj: It has not been a good year for the stock market, worst start to 2016 for a decade. Is this a good omen, bad omen, how would you approach the market from hereon?
A: Lot of these numerological studies in a lighter vain seem to suggest that if the first couple of days of the year are bad then the overall year turns out to be good and so on and so forth.
On a more serious note I would say that I did not quite anticipate that the risks which were building up for the equity market would come home to roost so soon and so brutally.
Having said that if you look at markets across the region, they are not really driven by country specific factors at this point of time. Even in India there is hardly anything country specific that investors are looking at. It is entirely driven by what is happening across the region and more particularly what is happening in China.
Even in China, while there are news about macro economic slowdown, particularly manufacturing and FAI, the bigger concern is the currency. I don't think anyone had anticipated that the central bank - the PBoC would actually indulge in a daily fix which was successively lowered than the previous day's closing. which essentially indicated that they were almost indirectly guiding the currency down which led to a concern about currency wars across the region.
So, all these things put together led to the pressure on this market and potential currency war leads to the possibility of further outflows from this region which is never a good news.
Coming back to your original question, I think we have to kind of grin and bear the first few days at least through this period of volatility in the market which is entirely driven by currencies across the region. Until and unless we are able to ride this round of turmoil out and may be look forward to slightly better earnings as well, it is difficult to predict a better future at this point of time.
Anuj: So, what about India in particular? Last year was about stock selection and portfolios did well even though the index did not reflect that. Would you say that this kind of trade is going to continue this year as well?
A: What you are referring to is correct stock selection. You are right in saying that the midcaps did better than the largecap universe and we are seeing in various surveys that rating agencies come up with. I think the large cap frontline stocks in India, apart from the consumer staples or IT services or healthcare we are also saddled with huge quantum of debt and as a consequence of that the concern on debt coupled with the concern on declining currencies led to underperformance by the largecaps which obviously had a bearing on the banks balance sheet as well. Essentially now we are talking about large sector contributions in the frontline indices of India, the banks are close to about 25 percent, the metals and mining companies are about 10 percent and so on and so forth. That is one of the reasons why the midcaps did a lot better. I think the midcap and smallcaps in India they tended to be more conservative in terms of their balance sheet structure and in terms of their capex cycle.
Having said that I would think that the real trick in this game is correct stock selection and sector selection. Like in 2015, 2016 is likely to be a very similar year. Correct stock selection would possibly lead to outperformance and there is no getting away from that.
Sonia: Which sectors will you bet on and which will you completely avoid now?
A: There are two or three key principles in selecting stocks or I would possibly call them very simplistically themes to play. First avoid debt and look at free cash flows, this is something that we have been thumping the table on for quite some time. That obviously leads us to a few sectors within India like consumer discretionaries or IT services, may be some healthcare stocks as well. However within these one has to look at where the growth opportunities are stronger and in particular for some of them I think even the currency could turn out to be a tailwind. So, that is the first theme that one should play.
Secondly, we are also seeing that as a consequence of this commodity price decline particularly oil prices declining sharply the entire chemicals and refinery complex across Asia is doing well. Their margins are expanding and we think the Indian companies would also benefit from that impact.
Finally, the private sector banks particularly those which are focused on consumer lending rather than infrastructure and corporate lending, they are the ones that would do better. So, we are very selective in the banking and financial space. However if one focuses on these two or three themes, it is possible to build a pretty decent portfolio in India.
Sonia: Leadership is a problem for this market and that has been the big issue that we faced last year as well. What about the two big sectors banks and IT, how would you approach them?
A: Out of these two we are clearly more positive on IT. We think that this particular quarter may not turn out to be spectacular - the December quarter which is going to be reported in a few days from now. However that has been well telegraphed and well talked about, well discussed by the companies. So, that shouldn't be a surprise.
Going forward IT service earnings and topline should expand particularly in the second half of 2016 led by buoyancy in orders from the US and also the currency tailwinds that I talked about just now. So, IT is something that we are positive on.
We also like the private sector banking universe but as you know within the Indian financial space a very large chunk is occupied by the public sector banks, though not so much in the listed marketcap, but close to 70-75 percent of the loan book is occupied by them. So, it is difficult to argue for a very spectacular performance from the financials. However IT logically should do better.
Anuj: That is the other big problem for the market, Larsen and Toubro
Below is the transcript of Manishi Raychaudhuri's interview with CNBC-TV18's Sonia Shenoy and Anuj Singhal.
Anuj: It has not been a good year for the stock market, worst start to 2016 for a decade. Is this a good omen, bad omen, how would you approach the market from hereon?
A: Lot of these numerological studies in a lighter vain seem to suggest that if the first couple of days of the year are bad then the overall year turns out to be good and so on and so forth.
On a more serious note I would say that I did not quite anticipate that the risks which were building up for the equity market would come home to roost so soon and so brutally.
Having said that if you look at markets across the region, they are not really driven by country specific factors at this point of time. Even in India there is hardly anything country specific that investors are looking at. It is entirely driven by what is happening across the region and more particularly what is happening in China.
Even in China, while there are news about macro economic slowdown, particularly manufacturing and FAI, the bigger concern is the currency. I don't think anyone had anticipated that the central bank - the PBoC would actually indulge in a daily fix which was successively lowered than the previous day's closing. which essentially indicated that they were almost indirectly guiding the currency down which led to a concern about currency wars across the region.
So, all these things put together led to the pressure on this market and potential currency war leads to the possibility of further outflows from this region which is never a good news.
Coming back to your original question, I think we have to kind of grin and bear the first few days at least through this period of volatility in the market which is entirely driven by currencies across the region. Until and unless we are able to ride this round of turmoil out and may be look forward to slightly better earnings as well, it is difficult to predict a better future at this point of time.
Anuj: So, what about India in particular? Last year was about stock selection and portfolios did well even though the index did not reflect that. Would you say that this kind of trade is going to continue this year as well?
A: What you are referring to is correct stock selection. You are right in saying that the midcaps did better than the largecap universe and we are seeing in various surveys that rating agencies come up with. I think the large cap frontline stocks in India, apart from the consumer staples or IT services or healthcare we are also saddled with huge quantum of debt and as a consequence of that the concern on debt coupled with the concern on declining currencies led to underperformance by the largecaps which obviously had a bearing on the banks balance sheet as well. Essentially now we are talking about large sector contributions in the frontline indices of India, the banks are close to about 25 percent, the metals and mining companies are about 10 percent and so on and so forth. That is one of the reasons why the midcaps did a lot better. I think the midcap and smallcaps in India they tended to be more conservative in terms of their balance sheet structure and in terms of their capex cycle.
Having said that I would think that the real trick in this game is correct stock selection and sector selection. Like in 2015, 2016 is likely to be a very similar year. Correct stock selection would possibly lead to outperformance and there is no getting away from that.
Sonia: Which sectors will you bet on and which will you completely avoid now?
A: There are two or three key principles in selecting stocks or I would possibly call them very simplistically themes to play. First avoid debt and look at free cash flows, this is something that we have been thumping the table on for quite some time. That obviously leads us to a few sectors within India like consumer discretionaries or IT services, may be some healthcare stocks as well. However within these one has to look at where the growth opportunities are stronger and in particular for some of them I think even the currency could turn out to be a tailwind. So, that is the first theme that one should play.
Secondly, we are also seeing that as a consequence of this commodity price decline particularly oil prices declining sharply the entire chemicals and refinery complex across Asia is doing well. Their margins are expanding and we think the Indian companies would also benefit from that impact.
Finally, the private sector banks particularly those which are focused on consumer lending rather than infrastructure and corporate lending, they are the ones that would do better. So, we are very selective in the banking and financial space. However if one focuses on these two or three themes, it is possible to build a pretty decent portfolio in India.
Sonia: Leadership is a problem for this market and that has been the big issue that we faced last year as well. What about the two big sectors banks and IT, how would you approach them?
A: Out of these two we are clearly more positive on IT. We think that this particular quarter may not turn out to be spectacular - the December quarter which is going to be reported in a few days from now. However that has been well telegraphed and well talked about, well discussed by the companies. So, that shouldn't be a surprise.
Going forward IT service earnings and topline should expand particularly in the second half of 2016 led by buoyancy in orders from the US and also the currency tailwinds that I talked about just now. So, IT is something that we are positive on.
We also like the private sector banking universe but as you know within the Indian financial space a very large chunk is occupied by the public sector banks, though not so much in the listed marketcap, but close to 70-75 percent of the loan book is occupied by them. So, it is difficult to argue for a very spectacular performance from the financials. However IT logically should do better.
Anuj: That is the other big problem for the market, Larsen and Toubro
. It is every day that it is
hitting a new low. What is going wrong here and would you buy the stock at
current price?
A: I would not talk about stocks in particular, but in general in the industrial space, we have seen a lack of orders which is a direct consequence of lack of private sector capital expenditure (Capex). Having said that, we are now seeing government sector Capex pick up. For some of these stocks, like L&T that you mentioned, margins have also been a problem, significant degree of their orders were from the Middle-East and as a consequence of the decline in oil prices, it is uncertain whether those orders would sustain or not.
So, the stocks that were focused on orders from Middle-East and other commodity producing countries may continue to see this uncertainty on margins and order flows in the near-term.
Coming back to the original point, we think that the government sponsored orders, particularly in railways and roadways are now beginning to pick up. We hear that work is progressing on inland waterways and even on ports. So, if the desired multiplier effect picks up, as a consequence of those orders getting executed, there could be, at least in a limited manner, we could see the beginning of the next Capex cycle though I am not very positive on that beginning in 2016 at least not in the first half. Later part of 2016 or more so calendar 2017 would possibly be the time point to bank on a Capex cycle recovery.
Sonia: What is your Sensex or Nifty target and would Nifty target and would you change it depending on the moves of the last few days?
A: There is no question of change, because we came up with the target just now. We have a target Sensex of about 29,400 by the end of 2016 which is about 15-16 percent higher than the current levels and we think that this will be predicated largely on earnings growth. For fiscal 2017, we think Sensex earnings growth would be in the early teens, maybe around 12-14 percent. Even though consensus right now is showing about 17-18 percent but we think that is overstated and there is a possibility of consensus earnings estimates declining from the present levels. So, about 12-14 percent earnings growth and very marginal rerating from the present levels should lead to a 15-16 percent appreciation from the present levels.
For the time being, we would stick to that. As I said, there is a possibility of earnings estimates declining from the present levels, but I do not think it would be as severe as we had seen in 2015 or the second half of 2014
A: I would not talk about stocks in particular, but in general in the industrial space, we have seen a lack of orders which is a direct consequence of lack of private sector capital expenditure (Capex). Having said that, we are now seeing government sector Capex pick up. For some of these stocks, like L&T that you mentioned, margins have also been a problem, significant degree of their orders were from the Middle-East and as a consequence of the decline in oil prices, it is uncertain whether those orders would sustain or not.
So, the stocks that were focused on orders from Middle-East and other commodity producing countries may continue to see this uncertainty on margins and order flows in the near-term.
Coming back to the original point, we think that the government sponsored orders, particularly in railways and roadways are now beginning to pick up. We hear that work is progressing on inland waterways and even on ports. So, if the desired multiplier effect picks up, as a consequence of those orders getting executed, there could be, at least in a limited manner, we could see the beginning of the next Capex cycle though I am not very positive on that beginning in 2016 at least not in the first half. Later part of 2016 or more so calendar 2017 would possibly be the time point to bank on a Capex cycle recovery.
Sonia: What is your Sensex or Nifty target and would Nifty target and would you change it depending on the moves of the last few days?
A: There is no question of change, because we came up with the target just now. We have a target Sensex of about 29,400 by the end of 2016 which is about 15-16 percent higher than the current levels and we think that this will be predicated largely on earnings growth. For fiscal 2017, we think Sensex earnings growth would be in the early teens, maybe around 12-14 percent. Even though consensus right now is showing about 17-18 percent but we think that is overstated and there is a possibility of consensus earnings estimates declining from the present levels. So, about 12-14 percent earnings growth and very marginal rerating from the present levels should lead to a 15-16 percent appreciation from the present levels.
For the time being, we would stick to that. As I said, there is a possibility of earnings estimates declining from the present levels, but I do not think it would be as severe as we had seen in 2015 or the second half of 2014
Happy Investing
Source:Moneycontrol.com
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