Weak coalition govt negative for global investors: Pratik Gupta

Foreign investors will react negatively if there is a weak coalition government with a populist agenda post 68631951 68632570 68631180 elections due to worries on the pace of economic reforms, the fiscal deficit and the rupee, said Pratik Gupta, MD, Deutsche Equities India. In an interview with Sanam Mirchandani, Gupta said he would prefer large caps over mid-caps and it would be unrealistic to expect the broader market to continue rallying aggressively due to slowing local flows. Edited excerpts:How big a risk is there of global growth slowdown and a recession in the US? How does India stand to be impacted in such a scenario?Deutsche’s global team was expecting a slower growth environment at the start of this year, and it’s just that the slowdown seems to be more pronounced, especially in Europe and China and lately in the US also. We’re not expecting a US recession this year — and we think the Fed will be ready to support if the economy deteriorates. India should do quite well if it’s just a modest global growth slowdown. Then, the premium for growth goes up and prices of oil and other commodities stay subdued which is a positive for our economy. But if it’s an outright recession in the US — that would impact risk appetite, and a reversal in foreign equity inflows would impact India as well. However, that’s not our expectation at this stage.What is the nature of foreign flows coming into Indian markets now?The initial part of the flows after the air strikes came from ETFs. A lot of the foreign inflows have also come into large block transactions. Now, we are beginning to see active money also coming in.What are the post-election government scenarios that foreign investors are looking at?Many foreign investors are now beginning to factor in the incumbent government coming back into power, based on various recent opinion polls. However, there are still many who remain on the sidelines and are unwilling to take on political risk in their portfolio given the poor track records of opinion polls. Foreign investors would react negatively if there were to be a weak coalition government with a populist agenda due to worries on the pace of economic reforms, the fiscal deficit and the rupee. Investors don’t like uncertainty — hence, if the same government comes back, the single biggest thing they will see is the continuity of policy making and ongoing efforts to reduce the fiscal or current account deficit and to improve the economy’s growth rate.In the overall EM space, you are overweight on equities. In terms of regional markets where does India stand?Globally, Deutsche has been overweight on equities as an asset class this year, and the main reason for that is we thought the Fed is largely done with its rate hikes — this got confirmed in last week’s Fed meeting which makes us more positive on Asian equities in particular. We believe even the ECB will be on an extended pause till end of 2020. In China, we expect accommodative policies and the trade tensions with the US are subsiding. In India, we expect the RBI to cut rates once again in April and possibly once more in June and the liquidity situation is also improving. The growth outlook for FY20 is also much better in India, which has lagged the Chinese market that’s up 26% this year (although it was down sharply last year), so there’s still scope for more appreciation. Hence, we are quite positive on India right now with the election outcome being the main local risk event ahead of us in the near term.Do you expect mid-caps to outperform largecaps this year?We prefer large caps to small- and mid-caps. That does not rule out short-term rallies. The rally in smalland mid-caps is driven more by the extreme undervaluation and underperformance of small- and mid-caps but on a sustained longer-term basis we still think large caps will do better. Valuations have not corrected to the same extent as stock prices. In an environment where the local flow is not so strong it is unrealistic to expect small and midcaps to continue rallying very aggressively. Also, the overall money market liquidity situation is still very tight.Which are the sectors that you are bullish on?Assuming we have a stable government outcome, one should be focused more on the domestic cyclicals and less on export-oriented sectors. Then, we would recommend underweight on IT services, pharmaceuticals and even FMCG to some extent which is defensive and focus more on the beta plays, the high growth domestic cyclicals. So that would be private banks, some select NBFCs which have a strong parentage and don't have any financing or asset quality issues.Next comes the capex or industrials story — cement sector and consumer discretionary. We like private banks with strong deposit franchise.We were a little bit early in recommending underweight on NBFCs and overweight on private banks but the theme is still the same. It hasn't changed which is that the liquidity environment is going to remain tight.With the bankruptcy code, most of the corporate banks have recognised most of the NPLs. the credit cost should come off very sharply going into FY20.

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