Markets may return 15­ - 20% this fiscal and do well in next 3 years, say experts:: economic times

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Indian markets will continue to perform strongly in 2015 and 2016 but investors need to be get used to moderate returns as the economy battles a rural slowdown, problems of high debt at India Inc and rising bad loans at public sector banks.

A majority of experts at the Economic Times Markets Roundtable held last week were confident that earnings growth will pick up this year and surge next year as government steps up its capital expenditure.

Largecap stocks look attractive now after they were beaten down badly in the rout that followed the Reserve Bank of India's interest rate cut decision and the forecasts of a below-normal monsoon earlier this month.

The panelists also concluded that the Sensex and Nifty could return 15-20% this financial year and do well in the next three years on the back of revival in capital goods and growth in consumer, IT, pharma and private sector banks. A passionate debate raged over whether public sector banks and small and midcaps were a good investment opportunity but a majority again felt that these segments could be avoided by investors.

Participants at the roundtable included some of the biggest and most influential names in the financial services industry. S Naren, chief investment officer of ICICI Prudential Fund; Nilesh Shah, MD and CEO, Kotak AMC; S Naganath, president and chief investment officer, DSP BlackRock Investment Managers; Neelkanth Mishra, MD and India equity strategist at Credit Suisse, Saurabh Mukherjea, CEO, Ambit Institutional Equities and Shankar Sharma, vice-chairman and joint managing director of First Global.

Some experts felt that return expectations were very high and investors bolted for the exit as soon as there were signs that growth would not keep pace with PE ratios. Investors need to moderate return expectations from India, said S Naren. "India represents the best structural story for the next five years and I believe India should grow in many areas," he said. One of the points if you exclude the earnings of commodity companies, the earnings de-growth is not as steep as people are taking about."

Indian markets have fallen in dollar terms in the year-to-date and have also underperformed other emerging markets. A controversy over minimum alternate tax and fears of a second consecutive below-normal monsoon keeping the Reserve Bank from cutting rates made investors sell down shares since the beginning of this month.

Many felt that the fall is a buying opportunity especially in large caps which have been hit the hardest. "To my mind, people who have missed out on the bull run last year should come and invest in these markets because I think this bull market has a lot more steam left for next 2-3 years, with significant upside," said S Naganath of DSP BlackRock. Earnings growth will pick up this year on the back of step up in government capital expenditure and will grow strongly in FY17.

"I am sure index earning growth from FY16 will be 13-14% and not single digit," said Neelkanth Mishra of Credit Suisse. "And if you look at the composition of where the growth is coming from, I will still expect some downgrade in metal and PSU banks and in all other sectors, I do not expecting any downgrades. We are obsessed about the central government. They matter in the long term, but the real growth is coming from the state level. There is lot of action in the state level, which is keeping me very bullish on India."

Earnings growth was in abysmal single digits for FY15 and a lot of that can be explained by a squeeze in governmental expenditure and the inability of private sector companies to invest and expand capacity. That may change this year after the government announced plans to invest and improve electricity, railway and road networks.

"In FY17, we will see substantial earnings growth," said Nilesh Shah, MD Kotak Asset Management Company. "If you improve 5% of the capacity utilisation, your profit will grow by at least by 10%. If you cut interest rate by 1%, your profits will grow up by 7%. On top of it, the government spending will give another 5% profit growth. It is not difficult to visualise 20% plus growth in FY17 and probably 10-12% growth in FY16."

The rural slowdown is likely to hurt growth but everything depends on the monsoon and its spread, the experts said. The Modi government's attempts to remove inefficiencies in the subsidy programme and squeeze out middlemen will hurt growth in rural areas. "What's happened in a positive way is that a lot of the pilferage has got squeezed," said Saurabh Mukherjea of Ambit Institutional Equities.

"In the last 12 months, but that pilferage was funding construction activity in a fairly large scale. So as you stop pilferage, you are sucking cash out of the rural economy, and sucking out construction demand. Over a 12-24 month period, we will put this right. However, the interim adjustment is going to be painful."

Small and midcaps have outperformed large caps in this edition of the bull run but Shankar Sharma of First Global felt that they are still a meaningful play given their status and the oversized impact regional governmental decisions can have on their business in particular states.

"Here, one state's revival can change the fortunes of a single company," he said. "That is the reason a lot of smallcap stocks trade at a higher PE multiple. These higher PE multiples for small companies may seem crazy but you have to view it in a different context than the largecap stock. Just two states doing well can change the fortunes of a smallcap company."