Small-cap and mid-cap stocks have witnessed a significant rally over the last few years which has resulted in their valuations running-up ahead of the expected earnings growth, Manish Kumar, Chief Investment Officer, ICICI Prudential Life Insurance Company Limited, said in an exclusive interview with Moneycontrol’s Kshitij Anand.
Q) The market seems to have climbed all wall of worries and is now set to climb above Mount 11k. Do you think the rally could fizzle out post the big event, Budget 2018?
A) The run-up in Indian equity market should be looked at in the context of the rally in the global markets led by the confluence of liquidity and synchronous global recovery.
In the Indian context, the rally has been on the back of various reforms implemented by the government such as the Unified Tax Regime, recapitalization of PSU banks, higher spend on roadways/infrastructure projects and thrust on affordable housing.
Given the rally in the last 2-months, the markets may be prone to a short-term volatility due to concerns related to slippage in the fiscal deficit, higher oil prices and withdrawal of global liquidity from emerging markets (EMs), including India.
Q) What is fueling a rally on D-Street apart from strong global cues?
A) Apart from global cues, the uptrend in the markets is being fuelled by strong fund inflows via domestic institutional investors or DIIs.
It is further deriving strength from other fundamental factors such as favourable government policies on infrastructure and affordable housing, thrust on the rural economy, visibility of revival in corporate earnings growth etc.
After two years of tepid earnings growth, we are now entering into a phase of double-digit earnings growth i.e. Q3FY18 which we believe, will improve further in the next two financial years.
Also Read - Economic Survey 2018 explains boom in stock market; revival in earnings remain vital
Q) What are your expectations from the Budget – will it be a populist one or growth focused. Prime Minister Modi has already indicated that the upcoming budget is unlikely to be a populist one?
A) We believe the government might refrain from announcing any major populist measures in the upcoming budget and will remain committed to the path of fiscal prudence.
We have reason to believe that the Union Budget would remain growth focused and the government would announce initiatives to boost rural growth in order to improve income levels of rural population.
This would result in higher growth across sectors and positively impact the GDP, thereby boosting the overall economic activity of the country.
The Indian markets are expecting some announcements on the fiscal slippage front; however, this will be compensated by higher GDP growth over the next few years.
Q) What are your favourite sectors which are likely to remain in focus amid Budget expectations?
A) The government is likely to take some measures to boost the rural economy. Hence, we are positive on sectors which are focussed on agro tech, rural consumption, infrastructure and capital goods. In order to gain from the measures taken by the government, we have been aligning our portfolio accordingly.
As the economy improves over the coming years, we believe, well managed private sector banks and PSU banks with a good retail franchise and high CASA mix will deliver good returns.
Moreover, other sectors such as defence manufacturing, autos, affordable housing, infrastructure and respective ancillary sectors may witness good growth over the next 2-3 years.
Q) Which space is likely to offer greater risk-to-reward to investors and why? Large-caps, mid-caps or small-caps?
A) Small-cap and mid-cap stocks have witnessed a significant rally over the last few years. This has resulted in their valuations running-up ahead of the expected earnings growth.
Hence, the P/E multiples of small and mid-cap stocks are more expensive as compared to large-cap stocks resulting in a higher risk-to-reward ratio for this category.
Q) High beta stocks have done extremely well especially in the year 2017 as well as in the year 2018. Do you think we are in a phase of euphoria or is this normal market action in any bull market?
A) The high beta stocks tend to outperform in a bull market environment and the market rally in 2017 was no exception. We believe mid and small cap stocks could be in a phase of euphoria and hence we prefer large caps over mid and small-cap stocks.
Q) The fundamentals might not support what we are witnessing on D-Street right now. Do you think if the liquidity tide reverses or we see a crack in mid and small-caps, a glimpse of which we already saw last week when the broader markets underperformed, could it make the markets nervous?
A) The markets are trading at P/E multiples of approximately 20x FY19 estimated earnings. When compared to the historical range of 14x – 15x estimated earnings, the P/E multiples seems to be on the higher end of the spectrum.
However, the revival in the earnings growth from the current quarter i.e. Q3FY18 onwards would gradually provide fundamental support to the market.
In case there is any reversal in liquidity, we expect the mid and small cap stocks to correct more sharply as compared to large caps stocks.
Q) If somebody plans to invest Rs.10,00,000/- now – what would your advice to them be considering they are in the age bracket of 30-40 years?
A) Typically, an investor in the age bracket of 30 – 40 years has approximately 25 years of work life before retirement. This means that the investor has the potential to earn and invest more in the coming years.
Keeping this in mind, retail investors should always remain focussed on their long-term asset allocation strategy depending on their risk appetite.
Moreover, they should invest regularly and systematically to achieve their long-term financial goals. Historical evidence suggests that equity as an asset class has delivered higher returns as compared to any other asset class.
Therefore, investors should allocate some portion of their savings towards equity as it will help them generate inflation-beating returns.
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