Look for stocks with better ability of earnings recovery: Chakri Lokapriya
Now it is largely a question of wait and watch as far as FPIs are concerned.
ET Now: What is happening as far as markets go? Monday was a great day, then you had two or three choppy days but do you think things are looking stable after the 8-10% move?
Chakri Lokapriya: What has happened is the corporate tax cut is like a line in the sand, going up to that event the market was negative, consumer confidence was low, corporate confidence was low and the companies were looking to downgrade their EPS estimates. But post the corporate tax cut, suddenly you have had a number of EPS upgrades ranging from 8% to 12%. Against this backdrop, what has remarkably shifted in a matter of week is confidence. Now we are going into the rest of this year with far greater confidence so which is positive for the market.
ET Now: When we just look at the FII flows, it is not something which is great but do you think at least the selling has stopped and that would be a key takeaway for the FII sentiment?
Chakri Lokapriya: Now it is largely a question of wait and watch as far as FPIs are concerned in terms of waiting for the earnings to come back. Suddenly some amount of earnings automatically come back because of the corporate tax cut. So, there maybe an 8% to 10% growth for the index, but it will become nearly 18% to 20% growth in EPS. That is the kind of a number which finds favour with the FPIs. I think you will increasingly see steady inflows over time, reversing the down flows we saw over the last two or three months.
ET Now: When we look at what has happened this week, do you believe that banking names which have done pretty well are one of the biggest beneficiaries of this gaining move?
Chakri Lokapriya: Banking will probably see the biggest earnings upgrades because of the corporate tax cut and so FY21 will be an even bigger upgrade than FY20. Against that backdrop you also have an NPL cycle which is hopefully peaking out and this corporate tax cut will help companies to revive and therefore new NPL formation will be kind of slow which will help banks perform even better and the valuations are still quite attractive for the banking sector.
ET Now: Apart from tax cut another interesting thing this week has been how some of the large PSU stocks have bounced back. Do you think any strategic investment of any of these PSUs would be an interesting space going ahead?
Chakri Lokapriya: A lot has been said in the last couple of months whether there will be an ETF or whether there will be a strategic sale. There has been some amount of clarity from the PMO that the government wants a clear divestment, rather than one PSU acquiring another, which is clearly a positive thing. If that indeed is the path we are going to follow, then there is a huge amount of unlocking to be done.
ET Now: Do you think there is value if somebody wants to invest into the mid or the smallcap space or should one stick to the large cap space in this environment?
Chakri Lokapriya: I would look at companies which have the ability to recover earnings in the coming three quarters more rather than differentiating between largecaps and midcaps. This is because even within the largecaps you have several companies which are trading at multi-year lows. I think sticking to largecap strategy is not necessarily going to make you money but rather sticking to ones where you see an earnings recovery whether it is a largecap or a midcap will prove to be profitable stock bets.