What is your view on the way how markets are set up and do you think we are reaching what could be called as peak of good news?Pratik Gupta: I am not sure we are at the peak of good news as yet because frankly, there is still plenty to come. The earnings environment is still actually very weak, so we cannot call it good news.
The management commentary across the board is by and large still somewhat weakish to at best neutral in most cases. So, we still are not really in a good news environment. The good news would be when I guess earnings really start delivering and you start seeing good earnings growth coming through.
At Kotak we are expecting the Nifty earnings growth to be just about 10% in the current year. We have seen a series of downgrades in the last few weeks and over the earning season. The good news is definitely in terms of I guess tariffs and geopolitics.
There definitely I guess there is a lot of optimism that things have settled down and the worst is over. But what definitely in our view investors globally are still very worried about a sharp global slowdown.
Just the uncertainty caused by the tariff environment that itself will create issues in terms of economic growth globally which in turn as far as India is concerned that impacts us relatively less, which explains why a lot of foreigners are still interested in India, but nonetheless our exports will get impacted, the merchandise trade exports and slowing global economy that hits us. On the flip side, we do benefit from lower oil prices, lower commodity prices, so that is helping for example a lot of our consumer companies or the companies where oil and oil derivatives are an input cost, so we have seen some benefit to margins. But generally, we think there are still many more things to look out for. For example, the RBI’s liquidity support, the lower interest rate environment. Hopefully, we will have a good monsoon. We are hoping that in the next few quarters finally the consumption slowdown that we have been seeing post monsoon that should start picking up. The private capex cycle has been frankly dead, so that should pick up.
And two very important factors – one is, all of last year we have seen a slowdown in the growth rate in government capex, that hopefully will start picking up after the monsoons. We have got a new bunch of finance ministry bureaucrats who are at the helm and hopefully they will drive things a bit more. And second is the regulatory environment.
You have got new regulators at the RBI, SEBI and likely at the IRDA as well. And generally, the mantra seems to be make it easier to do business, reduce compliance cost, all the players were sort of suffering. So, to that extent that also helps. The fly in the ointment is, of course, valuations, that unfortunately we still trade at very expensive valuations, so that is the thing that is holding markets, that is keeping investors away to some extent.
So, what could be the next big trigger as we say?Pratik Gupta: There is nothing visible as such. One trigger I could think of is potentially, for example, on Friday we saw India’s sovereign rating upgrade by Morningstar, now that is a relatively one of the smaller rating agencies, but you start seeing perhaps six to nine months later some of the bigger guys like S&P and Moody’s upgrading India.
That is a very big positive as and when that happens. Otherwise you have to literally wait for the private capex cycle to pick up which frankly was being held back because of uncertainties on either domestic politics last year, or tariffs or geopolitics whether you see China dumping and so on and that has been sort of held back last, I would say, three-four quarters that has been slowing down.
Any single big thing which I can think of off hand. Just one thing, the big thing to look out for is in our conversations with global investors, as you know emerging markets as an asset class has underperformed the US in particular for the last 10-15 years and finally, the weakening of the US dollar and a crack in the US equity bubble especially the tech mega caps in the US, we are beginning to see some incremental investments being made away from the US and we are seeing this helping especially some of the European markets, the Hong Kong, China markets and even India you have seen the last few weeks with the exception of Friday when we had geopolitical concerns, India has also benefited through some FII inflows.
So, as we progress in the year, the next big thing could perhaps be renewal in emerging market flows. The timing of that is very difficult to predict whether it happens three months later, six months later, nine months later.
But EM as an asset class has underperformed for so long, most people have forgotten about back in the mid-2000s when EM were seeing very strong inflows, so that could be something to watch for but tough to put a timeline to it.
