The market has corrected from the top but it is not in a comfortable valuation territory yet, said Sanjay Mookim, Director-India Equity Strategy, Bank of America.

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"Valuations are better than what they were in mid-January of 2018 but not yet in the buy zone", he said.

The crude is around $70 per barrel currently, however, Mookim says it will not run away in a hurry and remain in a range around mid $60/bbl.

According to him, though India outperformed the other Emerging Markets (EMs) earlier on back of favourable macros like lower crude prices, bond yields, it could under perform EMs at least for the next several months.

Talking about flows, he says institutional inflows are a good sign but are not sufficient to propel markets up.

"From a broader index perspective one can expect a 10 percent correction in price to earnings (PE) and the downside for midcaps would be larger", said Mookim.

Mookim also added that the house remained upbeat on the housing theme because of regulations like RERA, good demand and several government policies. "The cumulative momentum in housing is very powerful."

Below is the verbatim transcript of the interview.

Anuj: All through last year you were complaining that there is absolutely nothing that you can do in this market, it has run-up so much. Has the correction now got us back into bit of a value zone?

A: It is obviously better than before or mid-January. But I don’t think valuations have got into a territory where you can comfortably ask for people to buy yet. If you look at the Nifty it is still only back to where it was in December and in several midcap stocks and the midcap index price-earnings ratio (P/E) are not even back to where they were in December. So, yes, there is an anchoring biased, market has corrected from the top, but I wouldn’t say that we are in comfortable valuation territory just yet.

Latha: The latest scare, incremental scare is this crude engine towards USD 70 per barrel. How would you interpret this as an investor?

A: Our House view isn’t that crude will run away in a hurry. We think that crude remains range bound in the mid US 60 at best. However, it is a broader read across to India. If you remember India has outperformed emerging markets (EMs) dramatically in 2014. So, even after the recent weakness, we are still sitting on a fairly strong cumulative gain over EMs over the last three years in total. That gain had happened because of the favourable macro.

The macro is now deteriorating with the oil price, with reflation, bond yields and increase in political uncertainty if I am add. There is a lot for India to be worried about and none of this is going to change in the near term. So, we stick with our call. We think India will have trouble times. India probably continuous to underperform EM for the next several months.

Sonia: What about the flows? Domestic flows have been pretty good especially in the month of February that came in from Mutual Funds, how did you read into that and do you think that could be something that could continue through the course of the year?

A: Flows have been encouraging and that is a good sign. We were all comfortable on that count. We are hoping and all of us are that flows don’t start to reverse because that could be very troublesome. But I have been arguing for many months now that institutional flows in themselves are not an indicator or a sufficient enough explanation for the market upside. That is what we are seeing now. Because even though the flows are positive, we are able to see correction in the market. This maybe because there has been enough issuances, so the flows have been absorbed by paper supply but also because the upside was probably more driven by retail and High Net-worth Individual (HNI) flow rather than institutional flow that we all daily look at. Yes, the flows being strong is a good sign, but they may not be insurance from downside.

Latha: What is valuations zone for you and are some stocks already their?

A: From a broader Index perspective you would look for about a 10 percent at least correction on PEs. Now this could happen either because earnings expectations get upgraded or with time as stock roll forward into earnings. On midcaps I think the downside is perhaps larger because the premiums to large caps today are still very elevated.

Now what I want to highlight is that it is not just the earnings growth, but the earnings expectations also that matters. If you are in an environment where you are seeing continued downgrades for a companies then it is very for those stocks to perform. So there is this narrative that everybody looks at growth and saying this growth is going to come back this year which it will, but is it going to be better than expectation is the key question to my mind. We still struggle to see that happening.

MSCI India, we think it is trading India about 17.5 times forward PE whereas the long-term average is about 15.5 that is why I said that we need perhaps about 8-10 percent correction to get to close to averages.

Anuj: In term of portfolio positioning now what is your view on the larger sectors? Let us start with financials and then of course I would also want to know your view on IT?

A: Financials, we are overweight, we keep arguing that growth is going to continue to work. Until we start to see a major global correction growth is the style that will continue to perform. Within the financials our clear favourite is for private sector consumer oriented. It is kind of boring, but I have been arguing that your portfolio should be a boring portfolio in India, safe avoid risk sort of an attitude. That is where I am not allowed to name names, but there are very staple, standard private sector banks which have done well which might continue to do well, on the financials.

I can anticipate your question on the public sector banks perhaps which we would still be very selective there. We have buys on some of them, but I do think that you need to see some resolution to the current issues before the stocks actually starts sustainable upside. So, very selective positioning in public sector banks.

On IT, again, we are selectively stock pickers. As a sector I am underweight on IT because I don’t think you are in a growth mode in IT just yet. But expectations are improving in certain stocks and therefore there might be selective opportunities.

Sonia: I also want to check with you on what your view is on the housing theme? This was a theme that you had last year, the untapped potential in housing whether it is in cement, in paints, in real estate and that worked quite well. What is the status now, do you continue to be bullish here?

A: Yes, we are, we have done lot of work recently, reiterating our view on this and adding to those positions. Because we think that several issues or several blocks have fallen on place. Regulatory wise there is a lot more clarity with Real Estate Regulatory Authority (RERA), there is a price correction, time correction that you have seen with prices not really going anywhere for very long time.

The demand for real estate in India is infinite. I mean we dug up data, 40 percent of Indian households live in one room homes. This is not one BHK, it is just one room home. Even the average family size is 4.5 people. So, frankly, the demand is really not an issue. The government policies are working so it is not just talk, you are seeing numbers, you are seeing expenditure behind the housing schemes both in rural and in urban India.

Therefore, we do thin that cumulative momentum in housing is very likely to turn positive. You could play the real estate stocks, you could play the housing ancillaries, but on a two or three year theme we think this can be very powerful.

Latha: Have you all lately downgraded any numbers for the current year itself FY18 and have you all downgraded for FY19 at all? If yes which pockets?

A: FY18, we have seen a little bit of upgrades and this I think is because people have been marked to marking the December quarters numbers and how trends have been so far in March. As a consequence you have seen cuts to FY19 and dramatic cuts to FY19. MSCI India and in mid of December people who are looking at 27 percent growth for FY19 that is down to 18 percent already. So, significant reduction and I argue as a strategist that you might see a couple more percentage points of cuts for FY19 itself hopefully not more.

Sonia: What is your view on how the global setup is panning out? We got the FOMC policy, a lot of people indicate that it is not really a big deal whether it is three rate hikes or four from the US. We will be sort of moving on our domestic cues. Is that the feeling you are getting as well that India could decouple for the rest of the year?

A: No, I don’t think there is any reason for India to decouple. Decoupling would happen if any variable in India were favourable either the macro or the micro which is earnings. I don’t think that is going to happen, in fact even on the micro we are worse than the region where everybody else are seeing positive revisions, we are not. There is no case to be made therefore for a decoupling. If there is global uncertainty and increased global volatility, we will be joined at the heap to that phenomena.

First Published:Mar 22, 2018 7:22 AM IST