While global markets are being roiled every other day, investors are shrouded by a risk-off environment. Indian fund houses perceive the global situation to start stabilising with interventions from government and central banks. Speaking to Bloomberg TV India, Birla Sun Life Asset Management co-chief investment officer Mahesh Patil says another 4-5 per cent correction is a possibility for Indian markets. The deflationary impact on the topline seen last year will start to wear off and earnings growth is likely to be better next fiscal year, he said. Excerptss
It looks like we are in a bear market. Would you agree? Has the sentiment completely changed or do you still see scope for recovery?
I think clearly the global cues are negative and there is a risk off environment globally. I would not say we are deep into a bear market as I still believe it is a correction. We have seen similar kind of scare late somewhere in 2013 when the Taper Tantrum started. Markets that time also corrected pretty sharply.
I would say that currently people don’t know on the global sides especially with the fall in the commodity prices and oil, where is it going to settle and what repercussions it will have on large companies, some of which could probably default, or some of the economies, which could come under severe problem. I think that should crystallise in the next few months. When things go down so fast, you will see some interventions by some of the countries, which would probably stabilise the situation. So, I would say that in the interim huge outflows that we are seeing will continue.
And from India perspective per se, we feel that Q3 numbers, which are coming through, are not as bad as expected. The numbers have been pretty fine. But we will have to see the banking sector as that has been the sector which has led the market down and I think that would be the key to stabilise our markets over here.
How much more pain do you see ahead given that you are still expecting some crack in global equities? When you say some countries could step in, are you looking for further stimulus because a lot of analysts think that is what has caused the problem in the first place?
That is what you have seen the reaction from the central banks globally. Whenever there is something (crisis-like situations) they will come in for the stimulus. And I think that will continue as that is what they have learnt from the earlier lessons. Whether they would really solve the problem I don’t think so. But at least they will take care of the near-term pains and get back the confidence.
So I think that is something which we can expect with the way the things are going down globally. As regards to our markets, from here I think another 4-5 per cent correction is a possibility and which can happen. And at that level, we will find very good support for the markets especially for the Nifty and the large caps. Mind you, earnings have corrected and a lot of the pain has been already taken in. We expect the earnings from the bottom on perspective will start to revive in India from the first quarter of next fiscal year.
Do you really think a revival is expected that fast given the current environment and the big concerns around growth that we are seeing especially what is happening in banks or some of those heavily leveraged capital goods companies? If you are talking about earnings revival which segment are you looking at?
I think this year is clearly going to be a year where you have seen huge amount of downgrades. Probably, we will end the year with almost flattish or 4-5 per cent kind of earnings growth. For the banking sector especially some of the PSU banks and other large private banks which have got corporate focus issue, you will see that provisioning increasing. So you will take most of the pain in this financial year. In the next fiscal, the base effect would start to look much better.
Second is that, as we have seen, commodities prices continued to fall last year, I don’t think they should go down on a sustainable basis from these levels. So, I think a deflationary impact, which we saw on the top line last year, will start to wear off mainly in the first quarter of the next fiscal year. So that base effect will start to catch up on the top line as the nominal top line grows. The banking sector in the next fiscal year should do pretty fine as lot of the banks are now preponing the pain, which is kind of good and that is something that might impact the near term P&L and it should help things to stabilise over there. Even in auto sector, we expect some pick up. We cannot expect a big recovery with the global slowdown but at the margins, things would look sequentially better.