Next 6-12 months would be a challenge for the markets: Jigar Shah

After enduring volatility for the first two months of calendar year 2016 (CY16), global equity markets have recouped some of the losses in March. Jigar Shah, bottom, left, chief executive officer, Maybank Kim Eng Securities, believes the next triggers for the rally will come from a soft landing in China and no recession situation in the US.

"India remains one of the best long-term emerging market stories and investors will put in lot of incremental money if they get satisfied with the execution on ground by the government," he tells Puneet Wadhwa in an interview. Excerpts:

CY16 thus far has been mixed for global equity markets. What is the road ahead for the next 6-12 months?

Challenging. There is potential bad news flow from China and if the US goes into recession. Continued disappointment in corporate earnings could put pressure on the PER (price to earnings ratio), which is at 15x on a one-year forward basis for the Indian market.

To generate reasonable returns on equity, there is a substantial risk if there is a sudden sell-off or the liquidity tap dries. The trigger for a rally will come from a soft landing in China and a no-recession situation in America. Cuts in interest rates, passage of the GST (goods and services tax) Bill and full recapitalisation of the banking system will be additional triggers for the Indian market in particular.

Should investors be buying now or wait for more signs of stability before making a fresh investment call? Which sectors and stocks are you overweight and underweight on?

Investors should buy up to 50 per cent of their targeted equity allocation now and the balance on any correction. Overweight sectors include banks, automobiles, renewables, media & entertainment and cement. Consumer goods, capital goods and property are the underweight sectors.

Maruti Suzuki, Tata Motors, Exide, Lakshmi Vilas Bank, INOX Wind, INOX Leisure, Sterlite Technology, PVR, Dalmia Bharat and Bajaj Electric are the stocks we remain overweight on. Larsen & Toubro remains an underweight for us.

How are foreign institutional investors seeing developments in India in the emerging market (EM) context? What are their key concerns and do you see India getting incremental flows in the EM pack, given the macro headwinds?

Foreigners are not so happy, due to delay in implementation of GST, (the law on) land (acquisition) reforms and retrospective tax issues. India remains one of the best long-term EM stories and investors will put in a lot of incremental money if they get satisfied with the execution on-ground by the government.

Is the easy money-making phase we saw in the past one and a half years over? Has this become a stock pickers' market or are sectoral plays available?

It is a difficult market to generate alpha (abnormal return) and achieve risk-adjusted returns. Investors will punish earnings and balance sheet disappointment but will reward good governance and sustainability.

How do you see corporate earnings growth? What are your targets for the Sensex/Nifty for the next six to 12 months?

For our corporate coverage universe, we forecast 17-18 per cent earnings growth for the next two years. We have a target of 8,000 on the Nifty for 12 months, based on a PER of 16x one-year forward earnings.

The markets have not been able to sustain at higher levels and there seems a lack of leadership in terms of sectors and stocks that could dictate an uptrend. Which sectors could lead the next leg of rally/correction and why?

Global macro is driving the market up and down. Investors are rattled at times, due to big sell-offs which are not anticipated. Banks led the market fall and can build it back in 12-18 months. Another sector that can do better is infrastructure.

Given the recent developments/policy initiatives announced for the banking sector, especially public sector banks (PSBs), is it a good time to buy these stocks as a contrarian bet from a year's perspective?

Within PSBs, we like State Bank of India and Bank of Baroda, and feel the negatives are priced in.

Concerns regarding China have seen a sharp correction in global metal stocks, including India. What is your interpretation and how should investors tackle this sector?

Metal stocks are oversold but some of these might need consolidation or recapitalisation. We would avoid the sector for now, till clarity on Chinese economic growth emerges.