Only earnings can be the next big trigger for the market: Ajay Tyagi, UTI MF

In a chat with ET Now, Ajay Tyagi, EVP & Fund Manager-Equities, UTI MF, says consumer discretionary spend should also increase going forward of course monsoon is one impetus towards discretionary spending. Edited excerpts


ET Now: What would you say is the next big trigger for our markets? Last quarter, earnings were a disappointment and are two major uncertainties globally while this a BoJ or the FOMC we have certainty on that front. So what would you say are the big triggers for our markets?

Ajay Tyagi: I guess the big trigger left for the market is nothing but the earnings momentum as you rightly said Q1 was not really upt o the mark. But if you look at the trajectory over the last couple of quarters. We are definitely getting better on the earnings front. The impact of monsoons obviously could not have been felt in quarter but should be felt going into quarter two and quarter three, so I guess what carries the markets from here on would really just be the domestic earnings momentum rather than anything else.

ET Now: Most analysts The earning momentum do not expect to change at least till third quarter or the fourth quarter so till then which are the sectors that you are looking at, which are the sectors that you prefer at the moment?

Ajay Tyagi: So I think the biggest sector where we have you can say the highest weightages in a portfolio is really the banking sector but there are predilection is more towards private banks. I think these banks have continue to gain market share over the last 10 years but more meaningfully and in an accelerated manner over the last five years that journey should only continue into the next 5 or 10 years.

As you get the economy move ahead we would also see credit growth which has been lying in that band of about 10% inch up towards the higher teen number which by the way is their average number over the last couple of decades and should that transpire it is only beneficial for private sector banks which already has a requisite capital in place to grow their advances book.

Other than that I think consumer discretionary spend should also increase going forward of course monsoon is one impetus towards discretionary spending but you also have on the urban side things like the pay commission payouts and the OROP payouts so that I guess should also lead to better days ahead for the discretionary sector. On the contra side we are still reasonably positive about IT services and the pharmaceutical sector over the medium to long term. May be over the next couple of quarters they might continue to disappoint but the valuations at which they are trading today renders a huge amount of margin of safety.

ET Now: While two of the big global events definitely are behind us but soon we are going to be staring at the RBI policy come next month first week and it will be the new governor now at the helm who is going to be announcing his made in policy at that to your mind could this be a big market trigger and is the market now stepping into this event with all high expectations of a rate cut coming in?

Ajay Tyagi: Not sure whether it would be a big trigger or would lead to a big move one way or the other, it could lead to in case there is no rate cut it could temporary lead to some amount of disappointment in so far as banks and cyclicals are concerned. Like I mentioned and in fact you mentioned earlier the big events driving liquidity are really the global events rather than local events so if liquidity conditions remain benign across the world I think that would only lead to continued flows into risky assets like emerging markets, emerging market equities in particular and I think those are the events which really can rock the market if you have a sudden increase or an unexpected increase in interest rate but looks like as of now markets are building in a 25 bps kind of rate hike in December. If the trajectory of those rate hikes into 2017 is more than what the markets are anticipating that clearly would be the negative event. But other than that I really do not think that there are any great negative events on the horizon right now especially originating from within India.

ET Now: You talked about the fact that the big trigger internally for our markets is earnings and earnings only so what to your mind is going to actually show an earnings surprise in the months come by something that the market may not have priced in because the market continues to chase the NBFCs, select private banks, autos wherein earnings in any case are visible where is it that you think could be an earnings surprise or the green shoots are already visible but the market is not so gung-ho about these sectors as yet?

Ajay Tyagi: So I think earnings in the near term can surprise us on the consumer discretionary side, last year you saw and I am here quoting a very specific sector within the consumer discretionary space which is the paint sector I think most of us are really surprised by the kind of volumes growth which paint companies across the board have been showing over the last three quarters in particular.

I think they can be more such events within the discretionary space whether it is on the four wheeler side or the two wheeler side which can surprise us. If you were to peep outside of a couple of quarters pharmaceutical companies can also surprise us very clearly on the domestic side and if you look at the kind of revenues that come for the entire pharmaceutical pack from India on an average 35% of the revenues are basically Indian formulations or domestic formulations.

Here there has been a disappointment over the last one year in particular for various reasons one was obviously the extension of the Nelm list, second was WPI related price cuts which these companies had to take for the Nelm drugs and the third was the fix those combinations.

Unfortunately all of them happened just around the same time over the last three or four months and markets to my mind are not building shift back to normalcy for these companies over the next couple of quarters but I think that they would go back to their let us say 12% to 15% kind of revenue growth and that could come as a surprise. So I think there is a reasonable scope for earnings surprise coming in from the pharmaceutical companies.