Banking and pharma safe sectors amid market instability: Jyotivardhan Jaipuria

“If we see that spending coming, we probably hopefully will see a better demand environment coming through and that will help probably earnings to some extent in the March quarter,” says Jyotivardhan Jaipuria, Founder & MD, Valentis Advisors.

Give us your sense on this blanket tariff that Trump has imposed now, 25% on any and all steel and rather metal imports into the country. Give us a sense of what you are making of this and how, if at all, will India stand to benefit or lose out of this on the back of this tariff?
Jyotivardhan Jaipuria: Part of a larger plan. I guess what Trump is trying to do is that I will put tariffs there because it will make it easier for companies to set up manufacturing in USA and that will start helping manufacturing in USA and ultimately will help the economy.

Now, obviously, to some extent, the specific countries he is targeting and India has not so far been one of them and one could say that if he targets China and he puts more tariffs on China than India, it makes Indian goods more competitive and so it becomes a bit of advantage for India.

But the broader question will be what he will do is, in the last 30 years, we have seen a lot of globalisation happen. After WTO came in and tariffs came down across the board, across all countries, that whole globalisation system may get reversed and then it will be like a competitive set of tariffs happening across the globe.

Every country will start putting tariffs in and that will start probably hurting global trade. It will lead to a slowdown in the global economy. The second thing it does is inflation because once he puts tariffs in the US, it means inflation in the US will go higher and everybody else starts putting tariffs. Inflation, which has secularly come down, may start to rise if this continues.

My sense is at some point, we will start to see a stabilisation of the tariffs, though it has been very active once he has come in. Probably over the next few months, he will stabilise and put some tariffs which are very selective, but there will be a give and take and so probably hopefully, the policy environment will slow down and stabilise.
But in a market like this what we are seeing is that no good news is good enough to impact the stock price, but the slightest of the bad news is very bad to actually hammer the stock. Do you believe that this kind of volatility or this kind of mood of the market and the nervousness within the traders will remain for some more time for now?
Jyotivardhan Jaipuria: What we have to remember is this has happened after a long time. So, if we go back into history, a 10% correction in the market is actually quite normal. If we take the last 25 years, it has happened in 22 of the last 25 calendar years. We have seen it. It was just that we did not have it for a very long time, so when it comes back after a long time it seems very-very different from what has happened.

So, it will take some time to stabilise. But my guess is probably over the next few weeks, things will start to stabilise a bit. What we are seeing just now is a lot of pain in the small and midcap more than in the largecap so that is where probably things need to stabilise for people to start getting a bit more confidence in the market because the largecaps have been fairly stable since the start of this calendar year, but it has been the smallcap and the midcap which has taken a lot of the beating.

If we talk about the earnings of how it has been in quarter three so far, if you put it in a nutshell, it has not been as bad as the Street was expecting it to be at the beginning of the quarter three earnings season. Would you concur with this?
Jyotivardhan Jaipuria: So, I would say it is more or less been in line. But it is better than the previous two quarters. So, if we go back into history, the June quarter and the September quarter saw aggregate earnings growth of 3%. So, first half was like a 3% earnings growth. The second half we think will be better.

We think we will end this December quarter with probably a 6% or 7% earnings growth and the March quarter could be closer to 10% or maybe somewhere between 8 and 10. So, the next two quarters will be better and that is what we are expecting. So far, I would say earnings are coming out more or less in line with what we were expecting. So, not some stellar sort of earnings.

At the same time, not as bad as what we saw in the September quarter. Because September was a reality check for the market, that is where we saw a lot of earnings downgrades come in, lot of people suddenly realising that earnings are not doing as well. Somehow when the June quarter numbers came, there were a lot of events going around and market thought it is a one-quarter aberration because of the elections.

So, this quarter is turning out to be better. Hopefully in the next quarter we will see spending by the government on the capex because as they need to do probably four lakh crores in the last quarter of this year.

So, if we see that spending coming, we probably hopefully will see a better demand environment coming through and that will help probably earnings to some extent in the March quarter.

Give us a sense that which are the sectors you believe are the safe spots in this kind of volatile or weaker sort of a market right now.
Jyotivardhan Jaipuria: So, I will give you two sectors. One is what is totally out of favour, which is the banking sector and the reason banks are like relatively safe is valuation. This is one sector where valuations are probably below a 10-year average valuation and all other sectors are trading at a premium to 10-year average valuations.

So, it is one sector where valuations are in our favour. Short-term environment is not great. NIMs are under pressure. But given the valuations that we have today, whenever we get a turn in the cycle, then decent money can be made in the banks.

The other sector which has done fairly well, but we still like it, we think growth is highly visible over there for the next few years, that is the pharmaceutical sector where things are improving in the US, US generic pricing environment has been improving, demand is picking up so that is one space which we like.

We like the cramS space also over there because there we see a very secular growth coming in. The Indian companies earnings can grow at 25% compounded over the next five years. So, these would be two sectors investors can play in this environment.

This article was originally published by a economictimes.indiatimes.com . Read the Original article here. .