Neal Bhai Reports — Expect a 10% Slide in Sensex by Dec to 26k — Banks are important because they are a large part of the index and if you are constructing an equity portfolio in India, you cannot ignore it.Plus, they are high beta and are reflective of the economic cycle. Indian consumption as a theme continues to do well. This is not new. There are catalysts that support the consumption story.One is the Pay Commission which has just been implemented. We expect a bump-up in certain discretionary consumption. Plus, you have got monsoons. Distribution of rains has been okay and sowing was okay. So, you should see some pickup in rural India. While consumer sector stocks are expensive, we have been saying that that is the theme that should continue to tick and something investors should focus on.
Then, is it time to turn a blind eye to telecom, IT and pharma?
I don’t think these sectors are blanket stuff that you ignore. One can be selective. Where we think broad-based weakness lies is largely in capital goodequipment space because that will be a sector that lags economic recovery. You need utilisation to close and output gap to close before meaningful capex happens. Capital goods is likely to remain under a cloud for a while. In the other spaces like IT and pharma, I don’t think it is a blanket no. There are stocks which our analysts like and we think will differentiate from the rest of the pack.
With the possibility of a Fed rate hike and the US presidential elections around the corner, what is your take on the markets?
Our Sensex target for December is 26,000 and we arrive at that by taking the earnings growth that we expect for the year and FY18 and applying an average PE multiple to that. The downside on multiples would get you to about 26,000. If it undershoots, I think it is a great. It will become an opportunity to buy because India is instituting several reforms. There is hope that in 2-3 years, India’s outlook will decouple effectively from EM. If it were to go beyond the 26,000-level, I would look at it positively but our Sensex target for December implies a 10% downside.
You are bullish, yet you sound bearish.
There is great potential. India is doing the right kind of stuff in terms of policy. Our macro is good enough and in 2-3 years that has the potential to create a decoupled performance on earnings. The advice for people is yes you should be in India. India should do better than the EM pack over an extended period of time. In the near term, you should not be adding to risk in your equity portfolios. — Gold Silver Reports