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Non-Modi government may see 10-15% market correction: Gautam Chhaochharia, UBS

The broad-based pickup will disappoint. The earnings cuts will happen, says Chhaochharia.

ET Now|
Updated: May 17, 2019, 08.35 PM IST
Expect earnings cuts for FY20 despite optical recovery in financials earnings: Gautam Chhaochharia, UBS
Expect earnings cuts for FY20 despite optical recovery in financials earnings: Gautam Chhaochharia, UBS
Rural theme will continue to play well post new government formation, said Gautam Chhaochharia, ED & Head of India Research, UBS, in an interview with ETNOW.

Edited excerpts:

I am sure not one but all your clients are asking you who is going to be the next prime minister of India. How are you handling this question?

Anyway, we cannot have published political views across our bank globally. That is an easy way to dodge this answer and we give whatever we are picking up in terms of nuances etc and what the various opinion polls are saying.

If markets do not like the mandate and fall, will you tell your clients to buy or would you tell your clients to wait and watch?

It depends on how much it falls and who forms the government. So, the approach we follow is the fundamental frameworks. Our fundamental framework, the fair value for Nifty for December 19 is 10,000. If markets touch that or below that, then obviously it becomes an attractive zone.

The qualifier will be if the market does not get what it wants, which is a Modi-led NDA government, then the new government would want more clarity on policy. It would not matter what I recommend or what we say. Then the policy lay out of the new government will drive market sentiment and levels post that.

We have been tracking some other event risks as well. It may be the global factors, the trade wars for example. There is apprehension that India may also come under US pressure as part of the US’ overall strategy. Then there are Iran sanctions, elections. What according to you is really the biggest fear because we are still tracking plenty of other event risks currently?

There are event risks but as you have seen, even with the US-China trade war playing out and being a negative surprise, we have seen the markets consolidating and stabilising over the last couple of days. How much of it does really impact growth rates because trade war is still a negative risk. We are slightly more cautious on markets globally than they earlier. But overall, our base case is still that there will be some kind of deal over the course of this year and therefore it may not matter so much for markets.

The second thing to remember in terms of event or driver for markets is also what the central banks do. We still have not seen any signs of the Fed reversing its broader liquidity and rate stance. The markets are already pricing in Fed rate cut possibly later this year. That will also matter for markets but locally for now, the biggest event is next week and post that, the policy making and the reality check from tight fiscal numbers as well as slowing growth.

In light of that, what is really the earnings growth potential when it comes to corporate growth? We have seen a squeeze on capex and it is unlikely that on the private side we will see much on the government side post elections. What are you expecting?

We still expect an earnings cuts for FY20 despite the optical recovery in financials earnings because of the NPL cycle. The broad-based pickup will still disappoint. The earnings cuts will happen, roughly around 10% cuts for fiscal year March 2020. The expectations are very optimistic and across the board, ex IT services, the estimates are quite optimistic.

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