Geopolitical tension could easily result in 4-5% fall in Indian markets

Any escalations or tension especially military confrontation between nuclear states like North Korea, US, and its allies could bring a lot of uncertainties in the market, says Abhimanyu Sofat, Vice President, Research at IIFL.

Any escalations or tension especially military confrontation between nuclear states like North Korea, US, and its allies could bring a lot of uncertainties in the market, Abhimanyu Sofat, Vice President, Research at IIFL, said in an exclusive interview with Kshitij Anand of Moneycontrol.

Q) The geopolitical tensions especially emanating from North Korea weighed on D-Street as well as markets across the globe. Do you think this is just a knee jerk reaction or chances of deeper correction cannot be ruled out if it escalates?

A) Over the past couple of months, global markets are near their highs. The (VIX) volatility index at emerging market is at its lowest point in the last one decade.

Considering these factors any escalations or tension especially military confrontation between nuclear states like North Korea, US, and its allies could bring a lot of uncertainties in the market.

The special relationship between North Korea and China will also be tested in case of such military confrontation. One may see a 4-5 percent kind of correction in the market if the situation escalates.

Q) The June quarter results failed to lift investor sentiment. When do you see a recovery in earnings on D-Street? Earnings recovery is seen as the next big trigger which could lead the next leg of the rally. Do you agree?

A) The market has been expecting a recovery in earnings over the last couple of quarters, however, that has not happened because corporate earnings growth has not been there.

However, we expect as a result of declining interest rates, pick up in credit growth, improvement of further liquidity in the market, earnings growth is likely to revive from the fourth quarter of FY18.

Q) Any top five stock you feel that are a good buy but markets may have overlooked them?

Answer: CESC, Jain Irrigation, GIC.

CESC:

CESC is demerging its business segments into four separate entities: Power generation, Power distribution, Retail and CESC ventures.

CESC’ power distribution will be the first listed Power Distribution Company and is expected to earn steady ROE of 15-16 percent. We believe that demerger will lead to re-rating of multiples in each of its businesses and expect investors to benefit from value unlocking.

Jain Irrigation:

Jain Irrigations is currently the world’s 2nd largest and India’s largest micro irrigation company. For the Company, three major revenue contributing divisions are Hi-tech agri input products (~50%), plastic (~30%), and agro processing (~19%).

Strong outlook for all its business divisions, steady growth in EBITDA along with falling interest expense, improvement in working capital cycle led by lowering receivables, could drive sharp growth in EPS over FY17-19E. With strong cash flow generation,

GIC Housing Finance Limited:

GIC Housing is one of the leading housing finance companies in India with a loan book of Rs 9,200 crore by the FY17 end. The Housing Loan & LAP contributes 83 percent & 17 percent respectively to the company’s loan book.

Strong potential in loan book growth, improving LAP share in total loans and inclination towards lower cost of funds will improve its NII. Given these positives, we value the stock at 2.7x on FY19E P/BV.

Q) How is the IPO market likely to pan out in 2017? What are the issues expected to hit D-Street in September 2017?

A) We expect a lot of increase in the IPO pipeline from sectors like insurance, hospitality, and some other financials.

Considering that returns on recent IPOs have been considerably better than it was four years back, we believe investors are likely to making decent returns going forward also.

Q) How should investors plan their investments when markets are doing 1 step forward and 2 steps behind? Does it make sense to hold cash at current levels and deploy when some clarity emerges?

A) We believe, considering the levels where markets are, investors should set aside a part of their corpus, make a list of stocks with long-term potential with the help of proper research and use correction opportunities to buy into those stocks.

Q) What is your view on gold? Does it make sense to put money in the yellow metal?

A) Gold is a decent asset to invest from a diversification perspective. However, considering the emergence of new crypto-currencies such as ‘Bitcoin’, we believe relative attractiveness of gold has reduced. Nevertheless, one should keep it in their diversified portfolio.

Q) Market rally has already got many stumped. India is one of the best-performing markets globally. What are the reasons which you attribute for the current outperformance which will remain valid for the future as well?

A) Though it is not the only market, India has been helped by global risk-on trade. It is one of the better-performing markets.

In addition, strong domestic flows, especially nearly a billion dollar of SIP flows from mutual funds on a monthly basis has accentuated the rise of the market.

Q) FIIs turned net sellers in August? What is causing such massive drawdowns from equities?

A) We believe that most of the money exiting Indian market is not long term in nature. Long only India specific funds continue to remain bullish on the Indian market.

Besides, typically, whenever the market makes a top there is a lot of exuberance which is missing this time, indicating that the sharp fall in the market is unlikely.