Focus on largecaps in 2019, be selective as market liquidity problem continues: Emkay

The focus in portfolio investments should be largely on largecaps and to some extent on the mid-caps, and one needs to be selective in the investments given the liquidity conditions in the market, Joseph Thomas, Head–Research, Wealth Management at Emkay Global Financial Services, said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpts:

A. It may not be correct to say that much of the uncertainty is out of the way, uncertainties are part of the markets and they will stay with us in 2019, too.

Indian markets continue to face liquidity problems as the interbank shortages are funded by the RBI through repos. Unless liquidity conditions improve, interest rates will not be able to come down.

It is also important to see where the government finances finally end and whether the government will be able to meet the estimated budget deficit. India will be going through general elections in April-May, 2019.

The verdict will be important from the point of view of continuity in policies and also from the perspective of stability. The new Governor has taken charge at the RBI and it is keenly watched as to how he is guiding the institution in the coming days on all important matters for economy and markets.

The US Fed interest rate action, the continuing tariff war between the US and China, the sanctions on Iran and the conditions in the Middle East are all matters which will have an impact on the markets.

We need to cautiously tread the path to avoid the impact of uncertainties on our investments and portfolio in general.

A. We may see lower levels for the rupee in 2019 as the rupee levels are the result of what we do in trade and investments. The trajectory of global oil prices, export performance, and FII activity are the three factors which would decide the course of the rupee.

We have seen oil prices abating from their highest levels to close to $60. But, with output cut already in place from OPEC+, and further cuts expected as we move into the New Year, we may not see any drastic fall in oil prices in the coming months.

In the immediate term, the price may be around $58 to $62. Apart from this, a strong factor supporting the rupee is the FII inflows. As you are aware, the FIIs have been moving out form the domestic markets, both equity and debt.

But, we have seen some inflows recently, but that is too small or insignificant for the rupee. Given the fundamentals, the rupee could depreciate further towards 73/$ and then 75/$. Huge FII inflows can change everything but that does not seem to be the case at this juncture.

A. The focus in portfolio investments should be largely on largecaps and to some extent on the midcaps. It is true that we have seen quite a bit of correction in the midcaps and the smallcaps, but one needs to be selective in the investments given the liquidity conditions in the market.

Higher interest rates and the likelihood of slower growth emanating mainly from the widespread agrarian distress, and one should be focussed on cash-rich entities and export-oriented firms etc.

A. The FIIs are having a fresh look at the emerging markets as of now after the recent corrective fall in the markets and the currency depreciation which has been to the tune of 5-10 percent across different currencies.

So circumstances are favourable for them to modify the course. Let us wait and watch as to what they are actually doing on the market floor.

A. CPI has come down drastically below 3 percent. But this may not be a sufficient condition for the RBI to cut rates, as core inflation is still at 5.8 percent. RBI needs to address the liquidity concerns first and that would be the first step towards more benign interest rates.

With new Governor in charge, we could expect a change in approach to policy-making and markets. But, it is quite possible that the MPC may decide to move away from calibrated tightening to a neutral stance in the next policy.

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