There is always catching up between markets and earnings, and market often runs ahead of the rise in earnings, markets move on expectations of earnings growth.
Alternate – ‘Market rally this year fully depend on economic growth, expect first green shoots of a revival over next 2 quarters’
Earnings growth is positively correlated to growth in GDP and when GDP growth slumps earnings too would come down. Earnings growth may pick up only with economic growth coming back and this may take another 4 to 6 quarters, Bhavesh Sanghvi, CEO at Emkay Wealth Management said in an interview to Moneycontrol’s Sunil Shankar Matkar.
Edited excerpt:
Q: Most experts/economists feel the economy bottomed out last year. Do you agree with them or do you still see some more challenges?
The deceleration in economic growth has actually taken shape over a period of last two or three years, and therefore, any improvements in the situation would take time. With targetted policy initiatives in the budget, as well as in the monetary policy announcement, we are likely to see a gradual turnaround in the economic situation.
There is ample liquidity in the system, additional incentives by way of a concession on the cash reserve levels for banks for incremental lending to priority sectors, measures to boost rural incomes, greater access to overseas investors into the domestic bond markets etc. are some of the factors that are likely to have a positive impact on the economy.
We need to see a substantial pick up in credit, and credit flow, to preferred segments of the economy. We expect the first greenshoots of revival to appear over the next two quarters as aggregate demand and supply factors become stronger over time.
Q: The latest data suggests Coronavirus fears seem to be easing gradually. What are your thoughts?
The extent or spread of the epidemic will be a major determining factor as far as the impact of it is concerned. There are efforts at present both in China and in other affected regions to contain the spread. It is also pointed out that if the atmospheric temperatures in the affected areas rise as we are moving close to the summer season that in itself would act as a preventive factor.
Those businesses which are into consumer durables, electronics, auto components, pharma, solar panels, dependent on supply of material or components from China, may be adversely affected if the supplies do not start afresh in the next two or three months. Some other businesses like steel, leather, textile, paper etc. may find the situation beneficial as they may be able to export their wares to those who are used to buying it from China. Therefore, this epidemic may have both positive and negative effects.
To move on to the second part – there are various initiatives from the government and the RBI over the last six months, to provide a stimulus to both consumption and investment. While some of the measures which are part of the fiscal measures like the cut in corporate taxes will bear fruits over a longer period, some of the liquidity and monetary measures may have an impact in the immediate term itself. The full play of the beneficial impact will be visible over the next four to six quarters. Transmission of the ultimate benefits of fiscal and monetary measures will happen over time. Improvements in credit flow and credit growth, expansion in manufacturing and production, pick up in sales of crucial sectors would all give the first indications of improvements in the economy. But this will take time.
Q: Last year Indian markets gave 14 per cent return, but US indices rally over 20 per cent. Do you think our markets will outperform the US in next one year?
The returns which the Indian equities are likely to deliver and what the US equities would deliver are the product of two different sets of parameters which are more intertwined with domestic growth factors in each country. Which market is going to do better is relevant to domestic investors only to a limited extent as the domestic investors usually limit their exposure to overseas markets to 5 per cent of their overall investment portfolio.
The US economy has been in an extraordinarily fabulous bull run in the last ten years, and it is this economic performance that is behind the strong returns which US equities delivered in the last few years. Given the projections of slower US economic growth, the returns which were to the tune of 30 per cent last year may not be sustained at these levels, and we may see the returns probably moderating quite a bit. The performance of the last two or three years may not be sustainable in the light of relatively higher interest rates and lower corporate profitability. The performance or otherwise of the Indian equities would solely depend on the revival of domestic growth.
Q: Most experts said the earnings have not seen any major growth in the last six years and December quarter was also in line given the current economic slowdown. Also, FY20 is unlikely to be strong. What is your sense on earnings growth ahead and do you really see overall 15-20 per cent kind of growth in FY21?
There is always catching up between markets and earnings, and the market often runs ahead of the rise in earnings, markets move on expectations of earnings growth. The earnings estimates almost always are optimistic, and as borne out by the fact, the actual earnings have been falling short of expectations in the last few years. While this optimism may be justified to some extent, large deviations result in misalignment of prices with earnings and it results in painful corrections.
Earnings growth is positively correlated to growth in GDP and when GDP growth slumps earnings too would tend to come down. Earnings growth may pick up only with growth coming back and this may take another 4 to 6 quarters. From an investment perspective, this is the time to invest. Mid to lower double-digit earnings growth would be a more realistic picture of things to come.
Q: There are reasons to believe that PSU banks are still facing some NPA pressure, but private banks have been outperforming PSUs. What is your pecking order?
The NPA pressure has subsided, but it still continues to be a reality for the PSU banks. A significant reduction can be achieved only through deliberate measures to improve the quality of credit evaluation and credit administration. This may take more time than we have anticipated as changes are structural and deeper in nature. But the very fact that the fresh build-up of NPAs is being arrested would lend more strength to the PSU banks over a period of time. Therefore, it is going to be a long story when it comes to PSU banks.
On the other hand, private players have focussed on various factors that are crucial to performance, like reduction in the NPA levels, the decline in NPA growth, realisation of business through new products and modes, enhanced presence online and faster digitization etc. The faster business growth coupled with lack of any governance issues enthused investors to focus on the private banks.
Q: Much awaited SBI Cards IPO is set to hit the capital market in the first week of March. What are your thoughts on the same?
The credit card industry in India is underpenetrated, approximately 4 cards per 100 persons as against the 30 cards per person in advanced economies. SBI Cards is the second-largest pure-play credit card player with a strong parental lineage and well-positioned to maintain a strong growth trajectory. This may help to secure attractive valuations, though the objective of the OFS and IPO remains one of unlocking the value for existing investors, SBI and Carlyle Group.
For the domestic markets, this is an opportunity to be invested into the rising theme of consumerism and digitalization. Also, the market share of SBI Cards remains close to 18 per cent. This is more likely to grow with the benefits of the bank’s customers being won over and the focus on converting consumer spending into EMIs.
