Broad changes are happening in global macros. Uncertainty surrounding global events like talks of easing by central banks and strengthening of commodities has led to a sell-off by foreign investors, says S Krishna Kumar of Sundaram Mutual Fund.
However, these are short-term events, he says, adding that this is a buy-on-dips market.
The house is underweight on the IT sector. The market is well prepared for disappointing earnings from the sector and the next 2-4 quarters are likely to be low for IT, he says.
Sundaram MF is bullish on consumer discretionary sectors and private banks and non-banking finance companies (NBFCs) amongst financial sector.
Among private banks, Kumar’s picks include Kotak Mahindra Bank, HDFC Bank and IndusInd. He believes that Q4 can be an inflection point where beaten-down banks starts recovering.
Seventh Pay Commission as well as improving rural economy is likely to push demand for sectors like auto ancillaries and building material sector. Chemicals is another favoured sector which is benefiting from the Chinese move of capacity closure.
Below is the transcript of S Krishna Kumar’s interview to Anuj Singhal and Surabhi Upadhyay on CNBC-TV18.
Anuj: Let us start by getting your thoughts on what we have seen, this slight sort of risk aversion that has crept in. It has taken this market back closer towards 8,500. How do you rate things the way they stand now?
A: Over the last couple of weeks, we have seen there has been some broad changes in the macros globally. The European Central Bank (ECB) seems to be probably getting closer to stopping the quantitative easing programme.
The UK has again signalled its unease with quantitative easing even in the event of a Brexit. On the US front, the radar has been coming better and the Fed seems to be heading towards rate hike although the first one in this calendar year into December. So, there has been some amount of uncertainty surrounding these events that has popped up.
Along with that, we have also seen some of the measures or statements by Organization of the Petroleum Exporting Countries (OPEC) and Russia towards controlling supplies of crude which has pushed up crude to over USD 50 in the last 10 days. That is again a little bit of worry for many of economies.
Also, commodities, over a period of time have strengthened given the Chinese efforts to shut down unviable capacities, etc. So, there is a fair bit of reflation in commodities though not unwelcome. We need commodities to be at a certain level so that various economies which are dependent on commodities do well to balance the Budgets.
So, some of these things has created a little bit of uncertainty in the minds of investors, yields have gone up in the western world so that has put a little bit of profit taking and we have seen some selling from the foreigners and unwinding of long positions.
So, our belief is that it is a very short-term issue and as we have mentioned in this channel many times, we will have this kind of events that take place globally which will have an impact on flows but it is going to be a temporary phenomenon and hence, I would like to believe it to be a buy on dips kind of market and that is what is happening where we see good quality name being bought into this fall.
Anuj: Your thoughts on the earnings season or the start of earnings season. Both Infosys and Tata Consultancy Services (TCS) none of them of course, the market didn't have any high expectation from either of them and from the lows, both stocks recovered quite a bit. Your sense of largecap IT looking at both the numbers?
A: Once the Brexit decision came through, there has been a lot of uncertainty around on IT given the Banking, Financial services and Insurance (BFSI) segment being a big IT spender. So, people have been worried about it. Many decisions have been delayed and last three months, the IT companies have been talking about this in various conferences and calls.
So, the market has been well prepared to expect some kind of a disappointment from the IT bellwethers like Infosys and TCS and that is what has happened in a sense, in the sense that the future guidance of Infosys has been cut although second quarter was very good. On the other hand, TCS did report tepid numbers unlike the usual performance.
So, clearly reinforcing the fact that the IT sector could be in for a little bit of troubled times in the next 2-4 quarters and there is definitely a sense of lack of confidence on various IT companies and we stick to them. So, we do believe that IT is a significant underweight position and we have already reduced IT exposures across the fund house in a significant manner.
Surabhi: That is an interesting point because when I was looking at an older fact sheet, Infosys and TCS were very critical holdings for you in a lot of funds, in the concentrated largecap fund, in the diversified largecap, even in your tax saving funds. Are you done with paring you IT positions or will there be more of that as the next couple of weeks go by?
A: We have reduced exposure to the IT space significantly and though as a mutual fund, it is relative to the benchmark kind of position, so we have turned significant underweight on these companies ahead of the results as a sector.
Anuj: You of course are a midcap man and your midcap fund has really been remarkable, the way it is seen almost 30 percent CAGR over a seven year period. Looking at the latest holdings, you have three or four sectors which stand out, chemicals, auto ancillaries, and NBFCs. Do you think the momentum is strong in these sectors and do you think more importantly these stocks are good picks even at current valuations?
A: I think over the next couple of years, we do believe that the story in India would be more domestic led. The overseas businesses are going to be facing some amount of headwinds and so we do believe that the domestic consumer discretionary story is going to be a very strong play and auto ancillaries are a clear play on the auto space in the consumer discretionary area and we have seen the first half showing fairly strong growth from two wheelers and tractors and cars and recovery in the light commercial vehicles (LCV) also.
So, I think we do believe that this space will continue to do well along with things like building materials, cement which will also see significant traction as the economy gathers more steam in the second half. The seventh pay commission and also the rural income is getting better in the second half post a favourable harvest are going to have their impact on demand.
The consumer finance story continues to be and the retail NBFCs continues to be an area of high interest for us. We clearly see that these are companies run efficiently by promoters and professionals with a fair degree of control on spreads, control on spreads, control on the NPLs and the book and significantly clean provisioning done already so we have situations where return on assets (RoAs) are upwards of 3 percent, return on equities (RoEs) are in the range of 20-25 percent and growth visibility is in the range of 20-22 percent. So, this makes it a very confident exposure for many of us in our fund house. So, we do continue to believe that financials space, NBFC, and private banks would continue to be major portion of our assets.
On the chemical side, it is a mix of chemicals and agro chemicals, specialty chemicals. I think we believe that there is a strong trend towards outsourcing in specialty chemicals and agro-chemicals towards India.
I think China has been going through a phase of capacity closures and we are seeing European and American companies look forward towards Indian companies to be the supply chain in many of these specialty chemicals and hence visible growth opportunities are quite high here. Good margins, good asset turns and visible growth provide comfort to an asset manager. So, we remain positive in this space.
Surabhi: We spoke about some of the NBFCs, what about mainline banks, there are a significant exposure for you across your big funds, especially the largecap funds and this week has been interesting, we have seen the Nifty Bank fall more than the Nifty itself. Does that concern you at all, will you be looking at making any kind of changes or any kind of tweaks to your holdings which are pretty well diversified, you hold everything from a State Bank of India (SBI) to a Kotak Mahindra Bank to an ICICI Bank. So, it is a very diversified now, how do you look at the approach to earnings season in your position on largecap financials?
A: On largecap financials we are clearly focused on the private banks, the retail banks so HDFC, Kotak, IndusInd, Yes Bank would be some of major exposures there although we do have exposures to the corporate private banks but they are quite underweight.
We believe that the stress in the system is going to continue for some more time. We do believe that these corporate lenders are probably going through the last leg of de-rating and higher provisioning so give them a couple of quarters, the issues of corporate lenders would be behind us.
So, some time into the next three to six months we should be looking to add into some of these corporate banks basically and I think credit growth on the industrial side would be one trigger that we would also watch out for in addition stabilisation on the NPL front which we think will happen in the next three months. So the fourth quarter I think could be the inflexion point where some of these beaten down banks could come back well into favour.
Anuj: The other sector which has done well and where you have a lot of exposure is the gas sector. Stocks like Indraprastha Gas Limited (IGL), Petronet, what is happening here and do you stay invested in these stocks?
A: The liquefied natural gas (LNG) prices globally have reached the bottom and they have kind of moved away from being pegged to crude price on a slope basis. So, with kind of huge supply coming through on the natural gas front we are seeing that some of these user industries like City Gas networks, IGL, Mahanagar Gas Limited (MGL) are going to benefit.