The global money flow will not remain as attractive as it has been over the last three-four years, said Mahesh Nandurkar, India Strategist, CLSA.

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"The global growth might be improving but we need to be aware of the possible side effects as well, that the global liquidity conditions," said Nandurkar.

Talking about global markets, he said, “The coordinated global growth is playing out in the US. We have seen that happening to a certain extent in Europe as well. With the coordinated global growth improving, possible money supply will reduce a bit as well.”

According to him, FY19 equity supply pipeline looking as big as FY18.

Watch: Fundamentals of market not looking good especially on macro front, says CLSA

Edited Excerpts:

You have been slightly negative on the market for some time now. You reckon the market may have made a bit of a top for the year considering the kind of macro headwinds that we have at this point in time?

Yes, we think so. Right now the Nifty is just about 2% below the peak that we saw in January, given where the macro has been heading and the fact that the bottom up micro has not really improved as much as what the initial expectations were. While we talk about the earnings, the trend is improving, but remember that the earnings revisions are still happening on the downside. So yes, I would be willing to take my money off the table at the current levels.

There is nevertheless a global growth story playing out even the higher yields and higher commodity prices are because there is aggregate demand increasing. Do you think that provides a bottom for our market? Cannot fall below a level?

True. The coordinated global growth is playing out in the US. We have seen that happening to a certain extent in Europe as well. With the coordinated global growth improving, possible money supply will reduce a bit as well.

As we have seen the US treasury yields are now little bit higher than 3% mark and if they move up further from hereon, obviously the attractiveness of the other emerging market assets like the Indian currency etc... will reduce. There is also a possibility that if the growth picks up and continues to show strong momentum in Europe, there is a good chance that even the European Central Bank (ECB) will tone down its quantitative easing (QE) programme.

While the global growth might be improving, but we need to be aware of the possible side effects as well that the global liquidity conditions, the money flow will not remain as attractive as it has been over the last three-four years.

In that context do you get a sense that domestic flows have peaked out even in the month of April we saw about $2.2 billion of flows, equity inflows that is which is much less than the average over the last six months. You think flows have peaked out, especially in markets like India?

As compared to the previous six-eight months we were seeing almost $3-4 billion a month. The month of April was weak. On an absolute basis, I would still say that a number of $2-2.2 billion is not bad, but we will have to see that number in the context of possible equity supply, the corporate paper supply.

In FY18, we saw about $27 billion worth of equity paper supply and that was very well absorbed by the market because the domestic flow was very strong at $33 billion. Now going into FY19, our estimate is that the equity supply pipeline is looking as big as it was last year. So $2-2.2 billion kind of a number that we saw in the month of April may not be sufficient if the equity supply continues to be at that level.

However, on absolute basis that number looks okay, but what we also need to figure out is if there is any headwind coming from either by way of the long-term capital gains taxes which have already started to play out, is there some money moving into physical assets because there are some anecdotal evidence that the property markets are showing signs of bottoming out. So those are the factors that we will need to keep in mind.

Karnataka results came on Tuesday, a bit of a cliffhanger, the market got almost what it wanted, but BJP was elusive of that victory. Your thoughts on how big a risk politics is this year considering the fact that BJP is a single largest party and a lot of that happened after Prime Minister Modi’s campaign. Does that assuage some concerns about 2019?

The fact that the BJP emerged as the single largest party in Karnataka state clearly reverses some bit of negativity that has been setting in for the last few months. So to that extent it will help boost the investor sentiments but key was to see who ends up forming the government in Karnataka.

I think a lot of global investors are looking at that because it not only signals whether a party or the leader is popular or not, and that we have already seen, but also whether they are able to pull in the allies because that is also going to be an important factor going into 2019 elections. We have seen some amount of turnover in the allies; one party has left, other party threatening to quit but yes, there could be more new parties joining in as well.

So the investors will also be focusing on the ability to attract some of the allies. So that is something that will be on the top of the mind for investors but now the next political event is at least seven-eight months away and so that extent in the meanwhile the market focus will come back on fundamentals.

But my plea still is that the fundamentals look good; global growth is good, a lot of micro say, FMCG growth numbers, rural growth numbers are looking good. So what are you working in terms of earnings and what kind of valuations will be justified for you in the market?

I would say that the fundamentals of the market are not looking that great, especially on the macro side whether it is the bond yields, inflation outlook, currency outlook etc. So macro front is much weaker today as compared to what it was 12 or eight months ago.

Even from the bottom up side, as I mentioned, while the absolute level earnings growth seems to be showing signs of improvement but that is there in the number, that is there in the expectations already and at the margin what we are seeing is still small earnings downgrades. So we still need to keep that in mind and the thing is while in the last one-and- a half months we have seen the market rallying, that was because the domestic inflows were still quite strong and there was no equity paper supply. So watch what happens when the equity paper supply begins to hit the market.

Give and take everything; given that macros are weak, there will be a lot of equity supply in the near term. What do you think the fair value of this market is and how much of a downside can we estimate over the next one year?

We are working with an assumption that over the remaining period of 2018, at best we will get market returns maybe in low single digits – that’s the more optimistic case that we are looking at. So, in comparison to that I would say that some of the corporate bond fund or a low tenure debt sort of exposure might actually deliver better returns than equity over the next six-eight months.

For hardcore equity investors. Is there a safe haven buying perhaps some consumption names, IT names anything or this is not a year of equities you believe?

On the equity side there are certain segments that will do much better than the broader market. My sense is that over the next 12 months we will see consumption stories playing out well because both the central government and many other state governments will follow a pro-consumption policy, a pro-rural, a pro-poor kind of a policy and in that context a whole host of consumer names should do well.

The headwind for the consumer staple sector which would be the best way to play the story is the valuation that many stocks are in the range of 45 to even 55 times PE multiple. But if we do some analysis it is not very difficult to find some of the relatively cheaper names which are trading at about 30-35 times are on the consumer discretionary side. On the household durable side, even the tobacco sector, I think some of those names is a good way to play the expected improvement in the consumption theme.

I would also highlight that we continue to stay quite bullish on the housing story as well, we actually like the whole chain. So right from housing finance companies the property developers themselves will be a good way to play the equity markets over the next 12 months, in fact I would say the property story will be a multi-year story, it should play out over the next three-five years. So it is a long-term bet as well.

What would your reddest flag be? Where can things fall with a thud, where are they so terribly overvalued?

I do not think there is one specific pocket which has very high risk segment but where we have seen some of the interest rates sensitivities, we have seen the bank lending rates going up by about 20 bps or so so far, maybe they go up by another 20-25 bps or so or maybe a bit more.

Some of the names which are highly geared towards more leverage, higher debt whether interest costs can make a difference – could be more vulnerable. We see that the comparative intensity in the telecom space is also not over as yet. So that’s also a space where I would maintain my underweight on. So there will be some pockets where one needs to be cautious.

First Published:May 16, 2018 4:51 PM IST