Budget 2016: Provides for growth in a very difficult environment, says JP Morgan India's Bharat Iyer

There is an element of relief out there because there is no long term capital gains tax and the government has stuck to the fiscal consolidation target, says Bharat Iyer, JP Morgan India, in an interview with ET Now. Edited excerpts:

ET Now: What a welcome change it is to see the trading screen today back at 7200...is it all in anticipation of a rate cut from the RBI or do you think now that the big event risk of the budget is over, there has been no long term capital gains tax, the market is only breathing a sigh of relief?

Bharat Iyer: It is a combination of two things, one is as you rightly pointed out there is an element of relief out there because there is no long term capital gains tax and the government has stuck to the fiscal consolidation target. But that said we also have to compliment them on presenting a very balanced budget, which provides for growth in a very difficult environment, and again, as you rightly pointed out there is more to look forward to the RBI in all probability will cut rates over the course of the next month or so, so it is reasonably potent combination out there.

ET Now: Nothing has changed per se, the global situation is still the same as it was maybe even at the start of February the earnings picture does not look like it is picking up in a hurry. The only question is can this relief rally as we would like to call it at least today last for a lot longer than what most people are envisaging, the current thought process is 7300-7400 is about it I know you are not a technical animal out here but still what is your base case scenario?

Bharat Iyer: Well, when one puts out ones base case it is always never over a period of a month or two, I guess, but looking forward over the next 12 months or so I do not see any reason why Indian equity should not deliver returns of 12 to 15%.

Let us look at it after this sell off markets are trading below 15 times forward earnings which has actually been the historic mean over the last 10 years so valuations are reasonable if not outright attractive and we believe that the earnings cycle is beginning to bottom out and should start looking up from next year so our base case is 12% to 14% earnings growth over the next year and markets returns in sync with that.

ET Now: Where do you expect the maximum return in terms of earnings being made which pockets or sectors do you think is the revival going to kick in the fastest?

Bharat Iyer: I guess the secular sectors will continue to pump ahead the IT services space, the healthcare space, the consumption space but on the margin what should begin to do well is financials particularly the private sector financials we will see an earnings recovery there going forward. We have had reasonable rate cuts and we should see some signs of a pickup in the credit cycle.

The other areas that could perhaps look up is manufacturing sectors which are catering to the government’s investment cycle priorities of highways, railways, power transmission, defence etc. The capex cycle in India is just about started to tick up and we see that having legs.

ET Now: I remember a show that we did about six months-nine months back the thought process even then was that there is a sale out there you can go and choose things carefully I think the sale has only got meatier so banks or financial it is one end which is about 27-30% of the index what about, what the budget brought about the whole rural spend does this change the position in what was starting to look like a bit of a distressed space?

Bharat Iyer: As far as rural discretionary consumption is concerned, the budget is a welcome change. The government has rightly recognised that after two years of weak monsoons the whole segment is under stress and they have done what they could to improve conditions out there but I would not get carried away because let us face it at the end of the day the allocations have increased by about 8% to 10% but it is not more than that.

And secondly we still have to watch out for a couple of more variables how the current monsoon pans out, how minimum support prices for agri commodities are addressed etc. so yes is it relief on the margin yes but would one get carried away saying that budget is a game changer for rural discretionary consumption not in my opinion.

ET Now: What was the budget a game changer for, I personally thought that there was quite a bit done for housing and real estate but that is a very small pocket I do not know even if you have thoughts or coverage there, to your mind what was the budget a game changer for?

Bharat Iyer: I think the real game changer was the commitment and the adherence to the fiscal consolidation roadmap because this is where we must give them serious compliments because there was a lot of expectations that they might compromise on this to promote growth and I think they have walked the tight rope, I mean they have kept the fiscal consolidation process going and at the same time they have provided enough funds for growth. So I think for me that is the main game changer.

Apart from that, I think their earlier cycle investment priorities, they continue to provide and nurture those very well, be it highways, be it railways, be it power transmission, I think these have been priority areas and they continue to do very well. But going back, I would say that adherence to fiscal consolidation is the game changer really.

ET Now: Besides the domestic growth pick up what to your mind is the still the scary factor globally, what could actually derail the rally for us which has just begun since yesterday?

Bharat Iyer: Well globally the situation still looks fairly tenuous, we have a growth slowdown in China, we have a growth slowdown in Europe so I guess you know one needs to be still very-very ginger in the way one goes about investing in markets.

These are not markets where you can take a very long term view of life because one, the growth construct itself is very-very uncertain, secondly policy makers will have to keep making rapid changes to address this construct and that means that you know markets on a secular basis trend up but near terms they could be very-very choppy which is the reason one needs to be very-very agile and nimble in these markets.

ET Now: I am sure there were a battery of calls that you guys did with your clients, what was that message, if your clients were asking you whether or not JP Morgan India’s view is whether or not they should invest in India and if they should the pockets that they should pick up, what was the message really that you guys gave out this morning in your client calls?

Bharat Iyer: Well, as you know, we have been overweight on Indian equities for a while now and I guess from our perspective it was a little disappointing that Indian equities underperformed for the first two months of this year and I guess in that sense this budget is a big positive because the underperformance, I mean yes we can all understand a global selloff and there is very limited one can do to insulate oneself from that kind of sell off but the underperformance hut and I guess a large part of the underperformance was basically because of the concerns going to the budget, the ones you rightly summarised; will we continue to consolidate fiscally, will there be long term capital gains tax etc.

Now that those concerns are out of the way I think there is going to be a reasonable catch up rally that we play so that we catch up with the other markets in terms of performance if not start outperforming.

So I guess that is one powerful message that this was a market which was underperforming for the wrong reasons, those reasons are out of the way, the concerns have been allayed, so now it is going to play catch up so that is where one powerful argument over the near term. And the longer term stories remains intact, I mean, be it the demographics, be it financial inclusion, be it the need for infrastructure, I think those are all very strong secular themes going forward.

ET Now: Am I to understand as the key take away from this interview is that you were very happy with the budget, the fiscal adherence was a big game changer and financials to your mind is that big investment theme from a next 12-24 months perspective?

Bharat Iyer: Broadly yes. I guess yes. I mean, we are happy with the budget as I said, particularly because the concerns that the market had have been allayed. I think adherence to fiscal consolidation is the big theme from this budget and I think a lot of positives are going to flow through from that. And yes, I mean on a two-year basis financials should do very well.

Near term, our preference still remains for the high quality private sector financials but over a period of time I think the other names will join the party as well.