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Rakesh Arora on what could be the mid-term trigger for the market

Wait for revenue growth to pick up. Probably that would be a time to go long.

ET Now|
Jul 11, 2019, 03.47 PM IST
Rakesh Arora-GoIndia-1200
I am not really too disappointed and after the initial hiccups, the market will start to realise that enough has been done to kick-start the economy, says Rakesh Arora, MD, Go India Advisors. Excerpts from your interview.

Post budget, , what do you think markets are trying to price in now?
Clearly markets missed the stimulus package from the Budget and then comes this whole issue of surcharge in FPIs which had derailed the market. Now, it is starting to find its feet again. That means we are getting good monsoon and economy wise, things should be bottoming out. Overnight, we saw comments from the Fed chairman. Globally there would be enough liquidity . I do not see too much downside for the market. It is stabilising and consolidating very well and probably as the economy starts to move up, we should see a broader rally.

Why you are confident about the domestic macros? Why you feel things will start moving and that growth is bottomed out?
There are a lot of positives in the budget. Apart from that, the wealth tax surcharge has spooked the market. They have tried to contain the fiscal deficit. They are trying to create more liquidity in the domestic economy. They are trying to help out NBFCs, etc. They are pushing Rs 70,000 crore into PSU banks. All this is going to really support the economy. I am not really too disappointed and after the initial hiccups, the market will start to realise that enough has been done to kick-start the economy.

When do you expect the first signs of economic revival to come in? Will it reflect in infra, auto?
There are already some green shoots for consumer staples. There was some improvement in June. Starting with consumer staples, it will slowly percolate to the discretionary part. Autos would be the last to see it. Apart from that, in infrastructure, the new orders should start to kick in. The government has gone through a period of consolidation after the elections and as the new orders come through, there will be more euphoria on the infrastructure side.

What do you see as the next near-term trigger for the markets? Would it be a move by the Fed, would it be our own monetary policy?
We have to see execution on the ground from infrastructure perspective and as the interest rate cuts percolate to corporate plus, all this liquidity will come back to the system. We should start seeing more execution on the ground and revenue growth should start to pick up. We have to see when the revenue growth is picking up and probably that would be a time to go long. Market would discount what is going to happen in the next six months in advance. Any off shoots which are visible would be bought into.

Don’t you think that the monetary policy easing is already being looked into by the way 10-year Gsec is reacting? Sooner or later, would that provide valuation support for our markets?
Definitely, the cost of capital is coming down and as the 10-year yield is dropping, the market can factor in lower earnings yields. The percolation to the real economy through cut in interest rate for the corporates is happening at a very slow pace. That is what the government is trying to do by reducing their borrowing in the domestic market. As those effects of lower interest rates percolate to corporates, we should see a much better strength in the economy.

Any fundamental changes you would be making to your portfolio right now? Anything that you are looking at more favourably given the current scenario?
From sector allocation perspective, infrastructure is one of the best places because there is unambiguous focus. Financials. both private banks and PSU banks, are starting to look very good and given the turmoil in NBFC they would be gaining some market share and finally utilities to play the dropping interest rate because these guys are making fixed return and to that extent, they would gain bond proxies. These are the three main sectors where I would look to build my core position and then start to add to the consumption names on all declines.

Utility stocks have not done pretty well. They are mostly a dividend play for most of the people. Do you think, they will start to do well or could the dividend attraction be higher?
Rerating because these guys are doing around 16% ROE. When you are discounting that, at a lower rate they deserve a higher PE multiple. That alone makes them attractive. Apart from that, the government focus on various initiatives -- be it power reaching to every home and all that their growth outlook is also pretty decent for these companies.

Any risks that you would keep in mind? You have been sounding fairly optimistic today on a pick up coming in, but risks still remain on the global front. What would you be keeping an eye on?
Obviously the trade war is the biggest global risk that everybody is watching out and there is a possibility that globally the growth is slowing down. The only relieving factor is that central banks are aware of this kind of economic situation and are willing to take steps to increase liquidity and support their global economy. I would say if we get a neutralish global environment and Indian economy starts to find its feet back, probably things will start to look much better in the next few months.

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