State of the banking system: What has happened over the past five-six weeks has been quite worrying. So what has happened is, the non-performing asset (NPA) recognition issue has been changed, so, all the alphabet soup of scheme for sustainable structuring of stressed assets (S4A), strategic debt restructuring (SDR), etc. has been replaced with just insolvency and bankruptcy code (IBC). What this does is, it brings forward a lot of the lost recognition, and so, this erodes capital for the banking system. The bond yield increases that we have seen have also eroded capital for the banking system.

There are a couple of other concerns, the first is that the aggregate government spending growth, is likely to slow down from about 14% in FY18 to about 10% in FY19. The second concern is that there is at least perceived change in the possible outcomes of the next general election and as that political uncertainty picks up, as the state elections play out in the rest of the year, I think that can also create some overhang on the market.

So, you don’t think that there are enough growth drivers to counter the negatives you are speaking? Let us put the current growth numbers in perspective. So December quarter growth was 7.2%. The 25 year CAGR growth in India, GDP growth, is 7%, and five years CAGR is also something similar. So 7-7.2%is actually not very exciting growth. Now what we are saying is not that we see a growth collapse, but what we are saying is that a consensus view that growth continues on its upward momentum, that it accelerates from here to 7-7.5%, is unlikely to happen. So, very likely the peak in GDP growth or the growth acceleration is now already behind us. It is wrong to expect that we can see stronger GDP growth in FY19 than we are seeing right now.

I think private sector banks and the nonbanking finance companies will benefit. So that is why in our recent model portfolio changes we had gone neutral rate on private banks in  October last year when we thought that PSU banks would have growth capital and therefore margins would come down. However, now we have partly reversed that trade, we have now again gone overweight on private banks because they are going to benefit from this lull.

Clients view about India : The mood here is cautious, there are concerns emerging and all the news flow around the political developments, the concerns around the fact that there is uncertainty on how banking system profitability may emerge over the next 12 months all of these are issues.

For the next 12 to 18 months you are not just expecting a fall in multiples, but also a fall in earnings or rather a slower earnings growth? The P/E multiple premium that MSCI India enjoys over MSCI World, is about 17% right now. Slightly at the higher end of the band it has been in the last eight years, but it’s not really out of band or egregiously expensive. So you can spin an argument about a 5% drop in P/E multiple to make it the average of the last eight years, but it is neither here or there.

On the earnings, what has been remarkable in the September and December quarters, is that we have not seen any meaningful cuts in FY18 and FY19 earnings and as a result, as we move forward, as we roll forward six months, the one year forward EPS for Nifty and the BSE 100 is already up 10% in the last six months. So I would hate to be very bearish on the market; unless the global markets really tank or some really serious volatility comes because of this trade war, one of the key issues that is being discussed here and I am sure in media all over the world is a trade battle, a battle of tariffs between China and the US and how that plays out and the uncertainty it throws up.So unless something really serious happens globally, I don’t see a very sharp correction in the Indian market. However, the thing is, with all of these uncertainties, it is very hard to see it outperforming.

On NBFCs: On NBFCs, the key concern is valuations. I fully acknowledge that with the PSU banks becoming short of capital again and actually being reluctant to lend, the prospects for growth for the NBFCs are quite strong and therefore we are also quite constructive in our earnings forecasts on some of these companies.