There's value in technology and private banks: Mukul Kochhar, Investec Capital Services

In a chat with ET Now, Mukul Kochhar, Investec Capital Services, says the budget does not do much to start the investment cycle. It is going to take its own time.

ET Now: What have you made of this risk-on rally that seems to be gaining momentum globally and India for sure is participating?

Mukul Kochhar: Any substantial depreciation in China is probably not sustainable to start with because your current account remains in surplus and that would start exerting pressure on the currency as soon as the capital account stabilises. Similarly in the US, the mining economy which is under pressure -- the shale oil economy -- is just a small part of the US economy whereas housing is very strong.

The consumer is actually fairly okay there. So once again, you would not have placed the probability of US recession to be very high. Again, some of the Gulf states are under stress but there is no imminent danger over there. So, as soon as you started a little bit of risk on, it became self propagating because each of these stories per se can be questioned very easily and holes can be drilled into them.


ET Now: The other big factor which provides a trigger for the market was the way budget actually came about. It was not really as bad as people thought it would be especially on the long-term capital gains front. In fact, some say that it was very good. The rural thrust was much better than expected. Do you think the budget will be able to kick start capital expenditure in our country now?

Mukul Kochhar: That is where I have a little bit of doubt. I think our estimates in India continue to be slightly on the aggressive side partly because analysts have been thinking that capex will be revived quickly. Lately that thinking started getting questioned and I think rightly so. I do not think much has changed in the budget as far as that goes. The budget itself is an expenditure and revenue statement of the government and if you think about it, the central government budget is not that large to start with. Most of the expenditure gets spoken of within revenue expenditure. So capex for the central government is not that high.

Having said that, lately the policy announcements by the government have been serious. Even the budget had good intention to start with. The 3.5 per cent fiscal deficit target came as a surprise to market. Everybody was thinking that the government will relax, go a little slow on the fiscal deficit consolidation path. The 3.5 per cent fiscal deficit target came as a positive surprise. It shows intent by the government to go much stronger on the reform front but having said that, the budget itself does not do as much to start the investment cycle. It is going to take its own time. There is going to be deleveraging that is acquired. There is a lot of overcapacity in a lot of sectors that needs to be cleared out. So while we are on the right path, I think it is going to take time.

ET Now: How should one be approaching the markets right now?

Mukul Kochhar: There are a lot of expensive stocks out there. There are also some cheap stocks. So if one does stock selection, you may have trading rallies, you may have oversold conditions but over time, earnings drive stocks and so one should look at stocks which have decent margin of safety, earnings which are achievable so that your valuations become more believable and that is where one should focus. So we have been highlighting a few stocks in technology where some companies continue to perform well.

Over the last 6 to 10 months, technology is one of the sectors which has been earning upgrades which is quite rare within Nifty. So within that sector, we favour a few stocks like Infosys. We also like private banks. While there has been a rally in PSU bank stocks, we think capital should still be a constraint over there. One possible result of that is that they will grow slower and shrink their balance sheets and beneficiaries of that would be private banks. So one should continue to think about fundamentals, earnings and valuations. I do not think that has changed in the last week.

ET Now: To your mind, what are the big global risks right now? What are the chances that you will see the US slip into a recession? Are there any big risks that you think are emanating out of China?

Mukul Kochhar: I have already touched upon that. I was an analyst in the US covering one of the basic sectors, home building. A lot of wealth of the US consumer is actually tied to their homes and that has been appreciating. Home values have been going up every year, every month, actually year on year. So the consumer per se has seen some tailwinds. They have seen their disposable income go up because fuel prices have come down.

Now US is still a net deficit economy, so that way the consumer per se is very solid and the consumer is the most powerful driver of the US economy. If you read literature, the probability that the economists covering the US are placing on US recession stays fairly low and I am certainly in that camp. I am not giving it a very high probability right now, maybe 11-20 per cent probability.