India is currently caught amid global volatility, says Manishi Raychaudhuri of BNP Paribas. At the same time, quarterly results have disappointed and economic revival is not translating into corporate earnings, he says.

However, he expects to see a 20 percent upside in the market by December 2016 and sees Sensex at 29000.

Talking about the global market scenario, he says economists were initially of the view that the US Federal Reserve will raise rates thrice in 2016, but now they feel that it may not raise rates even once in 2016 and 2017. He also feels the European Central Bank (ECB) and Bank of Japan (BoJ) will stick to their monetary expansion plans. The Fed may join them too, he adds.



Below is the verbatim transcript of Manishi Raychaudhuri's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.



Sonia: It has not been a great start to the year at all, foreign institutional investors (FIIs) have sold more than Rs 20,000 crore in cash in the month of February alone, what is the sense you are getting about the mood before the Budget and how investors should approach it?



A: First of all, this FII selling that you referred to, it is not an India specific phenomenon. We have seen withdrawals from the entire gamut of emerging market and Asia ex-Japan funds.



If you look at the last six-seven months, we have seen almost about USD 8-9 billion been taken out of these funds on a monthly basis. This is possibly the most long drawn out episode of such outflows. As a consequence of this, India has been some kind of a collateral damage sufferer. It has got caught in the ruckus that has resulted from these emerging market outflows.



Now, there are of course certain India specific issues as well. In particular, if you look at the earnings estimates, they have not been great. We have seen over the last one month, three months and six months, the consensus earnings per share (EPS) numbers for any indices that you can think of, Sensex or MSCI India, they have come down anywhere between about 5-10 percent.



We have also seen quarterly results disappointing quarter-after-quarter. Almost last three-four quarters, we have seen single digit growth or in some cases no growth at all. Currently this small revival in economic growth, that we are seeing, is clearly not translating into corporate earnings and I think that is the biggest worry on the part of emerging market investors.



As a consequence, we have seen the emerging market investors' weight on India has also declined slightly. They still stay overweight. They have about 2-2.5 percent higher weight than the benchmark but that excess weight used to be anywhere in the range of 4-5 percent if you go back about six months to a year.



So, it has not been a good chart. Though, there could be some inflexion points going forward particularly pertaining to consumption recovery in the rural areas. Also, some degree of investment recovery more for the government sponsored projects but all of these are as of now relegated to the second half of the fiscal year 2017.



Sonia: Just a follow up to that point you made just about global collateral damage and how it is impacting India. You have a December 2016 Sesex target of 29,000, which is much above where we are currently at. What gives you the confidence that the market will move up despite the global volatility?



A: If you look at the market currently, the Sensex is at about 23,300. So 29,000 essentially means close to about 20 percent upside from here.



We are predicating that on the basis of somewhere around 11-12 percent earnings growth and maybe some small rerating. Having said this, I must also point out that when we came up with that target around late December last year, the market was at a slightly higher level and the concerns about earnings were not possibly so acute at that point of time particularly, the earnings trajectory in the banking and financial space.



So, while these tend to be moving targets, I would still see possibly about mid-teens kind of market appreciation as far as India is concerned this year.



Latha: What is the BNP Paribas view on the global jitters itself, does it look like after six weeks of rocky markets we are coming to some kind of stability or we are still going to experience this seismic shocks?



A: There are a few encouraging data points when it comes to BNP Paribas expectations. For example, if I go back about three weeks, our

US economists were talking about three rate hikes by the Fed in 2016. However, on February 11, we cut down that expectation quite drastically and now we are saying that in 2016 or 2017, we are not expecting the Fed to hike rates.



So, this global turmoil and the concomitant concern about growth slowdown has clearly had its impact on global central banks. Primarily as of today, we are seeing the ECB and the Bank of Japan clearly indicating that they are likely to stick to the monetary policy expansion path. We believe the Fed would also join the club at some point of time.



So that is positive and you have seen the concomitant effect on the DXY, the dollar. The dollar has depreciated over past couple of weeks in anticipation of this new found dovishness on the part of the Fed. So, I think this massive outflows that we are seeing from the emerging markets in the medium-term, we could see some kind of an ebb in those outflows and obviously that would turn out to be positive for the emerging markets.



Sonia: I noticed in your India strategy and your basket of stocks, you have a lot of consumption oriented stocks names like Godrej Consumers, some of these two-wheeler markers like Hero Motocorp etc, what if in the Budget this time, the government decides to postpone a bit of the Seventh Pay Commission spends in order to meet or get close to that fiscal deficit target. Then do you think that the pace of growth in the consumption pace could perhaps slowdown?



A: Right now, we are in a situation where the pace of consumption is not too rapid to start with. While urban consumption seems okay, rural consumption is still quite weak and the government in the Budget will have to focus on some alternative avenues of rural employment generation through rural infrastructure creation, more investment in irrigation and so on and so forth.



If we don’t have a third bad monsoon -- and historically we have never had three deficient monsoons in succession -- then we would possibly have some degree of recovery in rural consumption in the second half of the fiscal year. So, I am talking about the October-December quarter and beyond.



That could obviously be positive for the two-wheelers charts. You are right in pointing out that the government may postpone part of the Seventh Pay Commission payout though we think that even if it gets kind of spread out between two years, it would have some positive impact on consumer discretionary spend if we drop on the experience that we had from the Sixth Pay Commission payout. Of course that was much larger in magnitude. We must remember that and there was also an area of component in the Sixth Pay Commission.



However, all-in-all the low base -- that rural consumption has created for itself -- one can only hope for it to go up maybe not right away but possibly in the second half of the year.



Latha: What you see as trigger? Do you see the trigger for that inflexion point you spoke about as monsoon or the government doing something because government cannot spend much, so what is that inflexion point predicated upon?



A: Let me point out two-three different things. The first thing for a market revival, we need a revival in the earnings environment. The big question is where is that going to come from.



So, now think of the different segments of the economy. First, one needs a revival in investments. Private investments are not coming through because capacity utilisation is quite low and there is inadequate demand in the economy right now.



So, investment recovery would have to be predicated on government investment and fortunately, we are seeing some movement on that side. We are seeing significant degree of acceleration in road ways implementation, we are seeing new investments coming up in railways, possibly also in port and inland waterways.



Now, we must also remember that these large investments have a multiplier effect. So if we have two large factories, which are engaged in railway coach manufacturing, some bit of the component orders would obviously come down to the domestic private sector as well. But, for a larger chunk of private sector investment to come back, it is going to take a long time.



As far as consumption recovery is concerned, I made the point that some part of the Pay Commission expenses coming back into consumption and hopefully a better monsoon in the season this year is likely to accelerate rural consumption from the low base that we have marked out for ourselves.



So, if one looks at these two factors then one would come to the conclusion that the second half of the fiscal 2017 could turnout to be significantly better than the first half and we must not forget that over last six-seven quarters, we have had single digit earnings growth maybe in the range of 2-7 percent for India while the nominal gross domestic product (GDP) growth is still in the range of about 8-10 percent.



So, there is a big disconnect that we have seen and from this low base, it is quite possible that earnings would catch up at some point of time.