DeMo: 'Everyone is in a wait-and-watch mode'

'The Street is divided on when we could recover from demonetisation.'
'The government believes it is a pain at best for two quarters.'
'Some analysts feel the impact could be felt for two-three quarters and some that it could last for 12 to 15 months.'
'Investors are stuck in a no-action zone.'

Suhas Harinarayan, managing director of institutional equities at JM Financial, tells Hamsini Karthik not many investors are entering the new year with a high-return expectation from Indian equities. And cautions on extra volatility in the next few months.

Is the impact of demonetisation largely priced in for Indian equities?

It is difficult to say. The markets seem to be reacting and are expected to react further to a spate of upcoming events such as developments in the US, India-specific events such as elections, the goods and services tax and the Union Budget.

The next few months are expected to be super-volatile and some of this can continue till at least the March quarter results.

After the recent correction, the markets are trading at about 16.6 times the one-year forward price to earnings ratio, and that because commodities, driven by oil, have seen upgrades even as consumption-related sectors are seeing cuts to earnings.

So, the market is not very far from where we would recommend adding (which is less than 16 times the PE) and the best time to start adding would be on any dips in the coming few months.

Our market view is neutral, but we will get chances to add stocks in the coming months.

Will these uncertainties keep a check on investor expectation in 2017?

I don't think people are entering the new year with high return expectations, given the news flow in the past month or so.

Everyone is in a wait-and-watch mode.

It's best to stay neutral, so that one doesn't underperform due to any negative swings.

At the same time, if there are stocks which look very good on valuation parameters and are under-owned, then it makes sense to buy these.

Your outlook seems rather bearish.

The Street is divided on when we could recover from demonetisation.

The government believes it is a pain at best for two quarters.

Some analysts feel the impact could be felt for two-three quarters and some that it could last for 12 to 15 months.

Now, corporate India is slowing, saying it is going to take time to recover from demonetisation.

People will take a call on this as and when the data comes.

So, at the margin, compared to early November, it looks like we might be on a bearish phase.

Does demonetisation put brakes on India's consumption theme for a stock market perspective?

From a short-term perspective.

But, consumer staples and a few consumer discretionary stocks, especially within the building materials space, were already expensive.

At present, we see most people are having information technology and pharmaceuticals as the top picks to ride out this volatility, as well as currency hedges.

We also see value in some private financials, including NBFCs.

On the whole, investors are now stuck in a no-action zone.

I don't think anyone is taking a new sector bet.

Demonetisation also postpones earnings recovery for banks.

We expect earnings recovery in another two-three quarters. We will have more slippages from the (assets) watch list (of banks).

On retail banking (loans to individuals), with the dispensation from the Reserve Bank, there is unlikely to be a major impact in asset quality for banks.

Growth in automobile loans could come under stress, as sales of two-wheelers, cars and utility vehicles seem affected.

In mortgages, only the loan against property segment could be affected.

However, with the retail credit cycle having grown so quickly, one has to constantly be on the watch for any build-up of retail NPAs.

We continue to back the private financial sector over public banks, with an exception in State Bank of India.

Despite the structural issues, why does IT remain a buy for you?

In September, when we looked at the PE charts over the past 15 years, this was one sector where multiples had contracted.

Large-caps were available at a good price.

While structural concerns remain, for certain large-cap stocks, the market-implied growth rate is lower than the consensus and that is a fairly strong signal for these stocks.

We had turned overweight on IT stocks in September and while it is a risk-off trade, we expect the markets to soon start talking about deal wins and growth in the coming months as the BFSI sector in the US begins to report better numbers.

But IT is a tactical trade and we will review our call if we see any change in the stance.