Markets face reality check around Diwali: Saurabh Mukherjea

How do you see Indian markets, going forward?
The bull market had a first reality check when Sensex was at around 30000 three or four months ago, and we retraced to 27000. At present, we are at around 28000. The market is getting too excited about the economic recovery story. I don't think the recovery is happening quite at that base at which everybody is expecting. I think earnings and GDP growth will be lower than expected. In next 3-4 months especially after first quarter results, our growth expectations will be pulled back. Sensex at 25500 appears to be more realistic. Over 2-3 years horizon, we will continue the rally, but we have a reality check waiting for us post first quarter results around Diwali.

Is the government on track to fix the macro story? If most important Bills such as GST and land acquisition are not cleared in the monsoon session that is to begin July 21 what will be the impact on the market?
The government's reforms programme is a genuinely driven by reforms. It is trying to pull back subsidy, and trying to publicly attack black money. Running parallel, they are also taking public stand on crony capitalism. These are power reforms, but when you try to reform an economy it creates a short-term economic pain. We are seeing a multi-city broad-based pullback in real estate. We are seeing a big pulldown in rural consumption. These are powerful drivers that are holding back economic growth. GST going through in the monsoon session is a half chance, and land acquisition Bill might get cleared in the winter session.

What indicators will you see to assess if the macro story is on track?
India is following a classic example of economic recovery in the wake of structural reforms. The government has done a superb job in contribution with the RBI governor Raghuram Rajan taking a decisive step against inflation, protecting value of currency and keeping current account deficit in check. I think growth will pick up from next year.

Then why are the corporate revenues and earnings growth so weak despite falling input cost. If India's macro story is on the right track, what has hampered the recovery?
Although input costs have come down we are facing pressure on the topline. If you look at the volume growth of sectors of two-wheelers, cement companies, FMCG and paints sectors, we are seeing volume growth going into negative territory that clearly shows that the recovery has not taken hold. The reasons for this is that there is no pick-up in the rural demand side. The rural, semi-urban demand accounts for half of our consumption story. On the other, half of the capex comes from the real estate side that has gone off the rails pretty badly. I think these two sectors will take time to recover. 2016-17 is the year where we can see these two sectors picking up.

With the RBI raising inflation forecast to 6.4% by March 2016, aren't we done with policy rate cuts?
I think the RBI recently suggested that they are done with rate cuts in the current calendar year. I think RBI governor is deliberately taking hawkish stance on inflation, and he is doing to crunch inflation expectations. We expect a rate cut in next six months, provided the food inflation doesn't flare up.

Do you see monsoon above normal keeping food and headline inflation in control?
Good monsoon does give some expectations of relief on the food prices. My fear is that items such as fruits, vegetables, poultry dairy are going to accelerate pressurising inflation regardless of monsoon. Fruits, vegetables poultry and dairy account for 75% of food basket, and they have been driving the bulk of food inflation over the last 3-4 years. My fear is that they will flare up over the next 3-4 months regardless of which way the monsoon progresses.

Which sectors according to you will do well, going forward?
Next 2-3 months will be challenging. In particular, sectors such as banking, industries such as auto in particular will face challenge over next 3-4 months because they are linked to growth and they have rallied on the back of growth maturing, and because growth is not quite maturing there is a challenge ahead. So if I take a 2-3 years' horizon, good clean, sensibly managed companies regardless of market cap, having cash flow generation, strong balance sheet and believable accounts, one can invest in them. There is no point taking heavy market or economic risks and clouding up sectors on expectations of a wide economic recovery.