Economic growth has lost some momentum in recent quarters and latest data shows slowdown in consumption items like autos.
Stable inflation, rate cuts by RBI and sustained FII flows are some of the positives that will support markets. However, key is earnings growth, Sanjeev Zarbade, Vice President PCG Research at Kotak Securities said in an interview to Moneycontrol's Sunil Shankar Matkar.
Q: FY19 ended on a strong note, with the market rallying 15 percent. Do you believe there is more steam left in the market?
A: Given the market's increased confidence about the BJP-led NDA coalition retaining power post the 2019 national elections (albeit with fewer number of seats compared to its current position), we believe that markets may continue to trade higher.
Stable inflation, rate cuts by RBI and sustained FII flows are some of the positives that will support markets. However, the key is earnings growth. If the fourth quarter numbers pan out well, then markets can sustain higher levels.
Q: Where do you see value in terms of sectors?
A: The mid and smallcap indices have underperformed meaningfully compared to the Sensex during the fiscal. While the mid and smallcap stocks have recouped some of their losses from the February levels, we do see scope for further upsides.
Apart from that, we see meaningful upside in PSU stocks. This space has underperformed majorly in past fiscal, with one of the major reasons being share sale by Government of India. This has made valuations attractive relative to the market. Also, in view of the upcoming elections, we believe that risk of share sale by government is limited in the near term.
Q: What are the major global and domestic risks for the market after elections?
A: Among the global risks, we need to be watchful of the strength of global economy. In March, the IHS Markit PMI manufacturing data for the US and Germany had come unexpectedly weak, thereby triggering fears of a global slowdown.
Apart from this, US China trade disputes and firming up of crude oil prices are other risks. On the domestic front, the risk is that if the elections result throw up a fractured mandate.
Apart from this, the economic growth has lost some momentum in recent quarters and latest data shows slowdown in consumption items like autos. Industrial growth is showing signs of revival but remains weak at this juncture. Also, retail investment through mutual funds have slowed down.
Q: Auto sector has underperformed for many months now. Are you bearish on the space or is it a good time to buy select stocks?
A: Auto industry sales volumes continue to remain under pressure as OEMs are struggling with higher dealer inventory levels. Passenger vehicle industry is likely to post single-digit volume decline on YoY basis in March 2019 while two-wheeler industry volumes declined YoY led by Hero Motocorp and Royal Enfield.
Commercial vehicle volume growth also remained under pressure indicating spillover of the liquidity crisis. Given this weak in demand, we believe there is risk of near term profit numbers to surprise on the downside. We remain neutral on the sector. Among the stocks that we are positive on are Ashok Leyland, M&M, Tata Motors and Apollo Tyres.
Q: Many experts hope for recovery in real estate by end of 2019. What’s your reading say?
A: Residential real estate sales moderated in January 2019 (down 4.6 percent YoY) and this trend could likely accelerate in the succeeding two months up to March 2019 owing to the change in GST rates applicable from April 2019.
New launch activity has contracted more aggressively, due to weak demand and liquidity constraints. Home loan rates are up at the end of March 2019 as compared to a year before, which has impacted affordability. If interest rates taper down, then demand could start responding favourably, we believe.
Q: Are you bullish on capital goods, construction and cement stocks?
A: We are selectively positive on capital goods and construction. The investment/capex cycle still remains weak though may have bottomed out. There is limited investment interest in power, steel and O&G sectors.
However, government investment in road building remains robust. We like L&T, Bharat Electronics, Dilip Buildcon, Amber Enterprises and Engineers India.
We maintain our cautious stance on the cement sector on expensive valuations and constrained profitability in view of large capacity expansions which will limit capacity utilisations.
Q: How do you position yourself in the consumption space?
A: In the consumption space, we are cautious on the FMCG/consumer staples as there is minor upsides to our target prices.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.The Great Diwali Discount!
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