Domestic equities that fell over 5 per cent last year may rebound this year and can give a return of 10-15 per cent in 2016 to investors, Hitesh Agarwal, head research, Reliance Securities told Financial Express online during an interview. He further added that it is difficult for foreign investors to ignore the Indian equity market over the medium-term considering the growth dynamics the country. Excerpts from the interview:
Q. Domestic equity markets witnessed some selling pressure in 2015 due to China yuan devaluation, FII selling pressure, Fed rate hike worries and weak rupee. What is your take on stock market for the calendar year 2016?
A. The calendar year 2016 is likely to be a story of two halves, with the earlier part likely to remain challenging not just for the economy but also for equity investors alike. However, the Indian economy is likely to gather some steam towards the latter half, as the effects of increased government spending and the impact of additional consumer spending on account of the implementation of the 7th Pay Commission and OROP starts to positively reflect in incremental discretionary consumer spending. We expect these to keep Indian equities in good stead in the year ahead. Overall, we expect 2016 to be a positive year for the Indian stock market. A 10-15 per cent return by the year end from the Indian stock market is very much possible.
Q. Which sectors according to you are expected to outperform the broader market in the next 12 months?
A. We expect 2016 to be largely a year of adopting a bottom-up approach to investing. We expect consumption to be an important theme to focus on. Thus, sectors like auto, FMCG, consumer durables, media and retail are expected to be the prime beneficiaries of the incremental discretionary spend in the economy.
Q. Given the situation in the global market, do you expect foreign portfolio investors (FPI) to put higher bets on Indian markets?
A. Global capital flows are expected to remain challenging at least in the earlier months of 2016. However, post this, we expect the FPI flows to resume. We believe it is difficult for foreign investors to ignore the Indian equity market over the medium-term considering the growth dynamics the country has to offer in the coming period. Domestic currency outperformance relative to those of emerging market peers is also something which foreign investors would keep in mind. However, in the near-term, global economic stability is of importance from the risk-on point of view for capital flows into equities as an asset class.
Q. Do you feel that the market is fairly priced based on FY-16 earnings?
A. We believe that the market has already discounted the expected FY16 earnings. The focus is now on how corporate earnings pan out during FY17.
Q. Do you expect corporate earnings to improve in FY17?
A. We expect FY17 earnings to be better than FY16 largely aided by the base effect of last year and also aided by increased consumer spending towards the latter half of the year. However, the recovery is unlikely to be across sectors and even on an aggregate basis, achieving a high double-digit growth looks unlikely.
Q. Which sectors do you expect to show the biggest improvement in corporate earning in FY17?
A. While we do not expect a broad-based recovery across sectors, we believe that consumption related sectors like auto, FMCG, consumer durables, media and retail would be in an advantageous position in 2016 and 2017. Core economy sectors like banking, power, capital goods are expected to remain subdued in the near-term. However, we expect better earnings to be reported by IT, cement and metal sector companies.
Q. Which stocks can give good return to investors in 2016?
A. We would prefer to stay with large-cap stocks or the larger mid-cap stocks at the current juncture considering not just the brittle nature of the stock market in the near-term but also the fact that these stocks are available at relatively much attractive valuations compared to a couple of quarters ago.
Q. On the domestic front, do you expect the reform process picking up?
A. Even as important reforms like the GST Bill has been stuck due to political logjam, we believe the government has kept the ball rolling on the reforms front by moving ahead with the possible bits like FDI norms liberalisation, incentivising export subsidy, providing support for highway infrastructure, power sector restructuring, etc. We expect this trend to continue in 2016 as well.
Q. Do you expect the GST and land bill getting cleared by the Rajya Sabha in 2016?
A. The government has been trying to achieve a political consensus on important bills like the GST, but has been unsuccessful so far. We hope that these bills get cleared soon.
Q. How do you see domestic markets after fed rate hike. Can we see further rate hike in next year?
A. While a further 50 basis points (bps) hike by the US Fed is likely in 2016, we do not expect it to have a lasting impact on the Indian stock market in terms of affecting flows. We expect domestic triggers to soon overshadow the global developments.
Q. What is your expectation from budget?
A. The government is unlikely to significantly loosen its purse-strings for individuals, corporates or the market in general this time around. Note that while the government has a fiscal consolidation path to adhere to, at the same time, the 7th Pay Commission and OROP commitments coupled with the continued need to sustain government spending will be on the finance minister’s mind.