'Corporate banks and consumer discretionary stocks to lead the next bull run'

So, giving higher valuation to consumers based on lofty growth expectations would not be appropriate and better valuation metric to use would be based on strong free cash flows that most of these stable consumer franchisee makes.

In consumption, the next rally will be more in the services space, where our per capita spending is still very low.

Q) The Nifty is around 10% up from last Diwali. It has been a roller-coaster ride—record highs followed by a selloff. Can we say that the testing times are over or there is more pain coming?

A) The Indian market is swinging with two entirely divergent narratives. The near-term growth concerns remain real, while aggressive steps by the government ensure a very conducive medium-term outlook. Our markets are basically into a bottoming process. And, sideways alternative swings of rally and declines are what we are witnessing and we will keep witnessing for some more time.

Multiple economic cycles were at play. The down cycle in NPAs and liquidity deficit has bottomed out and the interest-rate cycle has become better for the economy.

Credit, consumptions, real estate, and economic growth remain in a downtrend. It is worth noting here is that the equity-market cycle always bottoms before the economic growth bottoms.

At the same time, we should deploy our money in phases, as sharp moves of rising and falling prices during this bottoming process will test our staying capability.

Q) Where do you see the markets in the next one year or Samvat 2076?

A) One thing that has eluded the Indian market in the recent past is earnings support. Remember, most of the price growth that has happened is on the back of valuation multiple expansion and not due to real earnings growth.

Corporate profit to GDP that has hit highs of 5.5 percent in 2008 has fallen to 2.8 percent. I believe in the next year this is set to change.

Indian corporate earnings will start exhibiting strong earnings growths from fiscal 2020-21 onwards and that will make the Indian equity market again the best wealth-creation story of the world.

Q) Is it the right time to invest in gold, gold MF or gold-related stocks?

A) Indian domestic purchases are no more the key driver of gold prices. Gold is an international commodity and Indian prices have to necessarily move in tandem with the global prices.

And, today gold is more of a global safe-haven asset class. In fact, buying by central banks world over and global ETF buying are the key drivers for the gold. As a prudent asset allocation, investors must have a portion of their investment in gold.

Q) Which are the sectors that investors can track over the next year?

A) Whenever an economy comes out of a prolonged downturn, it is the financial and consumer discretionary that do best in the initial years of the next leg-up.

For now, till the economy has not bottomed, the rally will continue in the quality names from consumer staples and retail financials, but during the next year, once the economy bottoms out, it would be corporate banks and consumer discretionary stocks that would lead the next bull-run.

So, a combination of high-quality retails banks, corporate lenders and consumer discretionary both in products and services space is the right portfolio mix right now.

Q) Diwali is a day when we start something new, what is your advice on portfolio management?

A) There is a real business behind every stock and in the long run, stock prices simply follow the trajectory in which the business moves, so, instead of following the stock prices, investors should follow how the business is doing and accordingly make their buy, sell or hold decision.

Q) Largecaps had a good run in Samvat 2075, do you think the next year will belong to small and midcap space?

A) My sense is that from here on stock market returns will not be cap-dependent. What favours largecaps right now is the tough macroeconomic environment that large companies have better financial and operational ability to withstand.

At the same time, the falling interest rate is very supportive of the smallcap. Also, post recent sharp fall, valuation in the smallcap space is favourable.

So now prudent strategy would be buying good quality companies selling at reasonable valuation irrespective of the cap they belong.

Q) Most of the high-debt companies were wealth destroyers since last Diwali. Which sectors could be the next pain points?

A) I think large pain of the weakening of fundamentals in terms of debt servicing is behind us, barring some sectors such as real estate, NBFCs, and power. Companies have passed through this pain of deleveraging their balance sheets.

But more than the debt, it is corporate governance issues and wilful default that have been at the centre of the market pain in the recent past.

Our economy is undergoing a massive change in terms of formalisation and not only formalisation in terms of production and services, but in terms of the way money flows in the system.

Surely a legacy system, with all its plusses and minuses, has to give way to a new more transparent way of transacting for India to be among the top three economies of the world. So in a way, it was a necessary pain that we had to go through.

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