The fund house is bullish on financials, consumer discretionary, and cement
The Indian economy, which took 68 years to hit the USD 2 trillion mark, could well double in the next 7 years, Sunil Singhania, Chief Investment Officer, Equity, Investments at Reliance Mutual Fund told Moneycontrol in an interview.
"Our view is that from 1947 to 2007, we (India) grew to USD 1 trillion economy; the next 1 trillion was generated in 7-8 years. So, in 67-68 years, we became USD 2 trillion. Our view is that this USD 2 trillion in the next 7 years will become USD 4 trillion," Singhania said.
"We do expect that the market cap should be 1:1; so market cap over the next 7 years can be USD 4 trillion,” he added.
Singhania also applauded the fact that investors are getting matured and smarter and are investing through systematic investment plans and he hopes that USD 2 trillion to USD 4 trillion growth journey of the economy should largely be contributed by Indian investors.
"The systematic investments have been really stable and, hopefully, the jump form USD 2 trillion to USD 4 trillion will be shared by many more Indians," he said.
Singhania expects companies to deliver 17-18 percent earnings growth in the next two to three years.
Commenting on market touching record highs, Singhania said, “A record high does not mean that markets are overvalued. In the last 2-3 years markets have given less than 10-15 percent CAGR (compounded annual growth rate) returns but on a PE basis Nifty is 10-12 percent higher than 10 year average.”
If an investors have a time-frame of investing for 2-3 years then maybe markets are not expensive, but if an investor is looking at 3 months then maybe the market is 10-15 percent expensive, he added.
When asked about valuations in the mid-cap space, Singhania said, “There is one category of stock where there is over valuation and those stocks have already corrected when the market corrected. Maybe, if you have a news flow which is negative those stocks might correct a bit more."
He also said that a section of small and mid-caps stocks are in the ‘euphoric’ zone. He cautioned investors to be careful about these kind of stock or tip-based stocks.
However, Singhania believes that mid-caps will perform better in a growing economy, adding “…in the medium to long term we continue to believe that slightly higher returns will be made in the mid and small cap space compared to large caps.”
Singhania said that the events that are considered to be positive for the market may even turn negative at times.
“There are positives like good monsoon forecast, GST. But all these can be negative also. There is a possibility that monsoon may play hide and seek. It is possible that because of GST some companies sales might get a little bit challenging over the next 3-6 months. There is a possibility that some geo-political event happens in the world,” Singhania said, adding that crude oil prices are expected to remain soft. However, geo-political events may lead to prices to spike up.
On question of whether GST could be a disruptor, Singhania said the impact of GST has been analysed for the last 2-3 years. So, there might be challenges for the first 3-6 months but since we are in a competitive world companies will be able to adjust to it.
“If they (companies) have to bear higher rates they will pass on gradually and if they are beneficiaries they will not be able to retain everything,” Singhania said.
Reliance Mutual Fund is bullish on financials, consumer discretionary, and cement. “We have moved some money to one corporate banking and to beneficiaries of financial assets as a saving instrument,” Singhania said.
“As a reflection of a good monsoon, we are positive on consumer discretionary; we expect rural demand should be good plus urban consumption is also sort of picking up whether its car sales or retail sales. We also like the government capex side but we don’t like construction companies so we are playing it through cement,” Singhania added.
On the rationale of avoiding construction stocks, Singhania said, the fund house is not too comfortable with the construction space and has decided to play on ‘Housing for All by 2022” project through housing finance companies and cement companies.
Interestingly, Singhania likes IT stocks where most fund houses are running an underweight position.
“We like IT. IT companies are still growing. Although the growth has slowed down they are still growing and they continue to generate huge cash flows. More importantly, they have started distributing that cash flow by way of higher dividends or buybacks. We are seeing interest coming back to this sector," he said.
Speaking about the pharma sector, Singhania said that it is a classic case of overvaluation coming to a fair valuation and it is time for the fund house to consider pharma stocks for investments.
“In 2015, they (pharma stocks) were significantly overvalued so there was PE correction and there were challenges like slowdown in US sales; there were some news flow both from the US and the Indian government. At these levels it’s time to have a look. Though we would be little measured in taking positions and it would be much slower,” Singhania said.
On FII flows, Singhania said, India has been a favorite investment destination and will continue to be one with flows getting stronger as we move forward.The fund house is fully invested in all its equity schemes and is sitting on minimum cash levels of 2-3 percent.