Digital theme key; build portfolio in next 3 months: Max Life

There is still money to be made in bonds, he said, adding that he expects a couple of rate cuts in next year.

He expects markets to correct by 5 percent as a lot of global events like Donald Trump’s presidency, French elections will have a bearing on them.

He is not very keen on IT, as the sector has saturated. Pharma companies haven’t come out of shadow of its FDA issues.

Although FIIs are pulling out money, local flows are robust, he said. “Insurance companies and MFs continue to get money,” he said.

He expects the Budget to throw up positive news on rural housing.Below is the verbatim transcript of Mihir Vora’s interview to Latha Venkatesh & Reema Tendulkar.

Latha: How is life looking for equities in the first half of 2017? Will we still be reeling under the negative corporate results because of demonetisation?

A: I would not say we would be reeling because a lot of the reeling is already happening as we speak, so to say. But yes, not all the analysts and not all the investors have really cut earnings estimates aggressively so far, which should happen in the next three-four weeks as we go into the earnings season. And probably the next three months might be a good time to start looking at stocks which you missed out the last time around and wanted to buy in any case good quality stocks, structural growth stories that we wanted to buy, where now, they are pricing in a lot of negatives. So, I would say some more time to go, some more downside in the market over the next weeks, but next three months would be a good time to start building the portfolio.

Reema: There has clearly been a lot of dislocation in the markets globally as well as domestically. For 2017, could you give us the top-three themes, for instance, towards the end of the year e-governance companies, etc. have also emerged as a big theme. As we stand at the cusp of 2017, what will be the big-three themes to play?

A: As far as India is concerned, two years back we were of the opinion that infrastructure spending, especially led by government and private spending will be the key drivers but that has not happened to the extent that one expected it to happen. The other thing that had developed was strong rural and urban consumption which I think, will continue. So, the setback that we have seen over the last few weeks is temporary and urban and rural consumption should continue to be the theme that one should play. The emerging sectors like financial technology (fintech) and e-governance, etc. are good sectors to be in but my guess is most of the opportunities are still not listed. They are still in the digital space.

Reema: So urban and rural consumption is going to be the big play for 2017?

A: Absolutely.

Latha: You said that now is the time to pick up the long-term stories, the structural stories. What are these structural stories?

A: Pretty much the same as what we have seen over 2016 which is public sector banks for example, giving away market share to the private sector as well as to the non-banking finance company (NBFC) space including the microfinance space, etc.

Latha: So private sector, NBFC and especially microfinance NBFC would be your pick?

A: Absolutely. And of course, the general consumption stories especially on the discretionary side and now in this last couple of months even the fast moving consumer goods (FMCG) space, which we thought was quite expensive, has corrected decently. So, in the consumption space, many more opportunities are opening up compared to a couple of months back.

Reema: In the consumption space, how would you play it because there are the likes of Jubilant Foodworks, etc. where the business model to some extent has been disrupted because of what has happened and the stocks have gotten derated. So, it is a very broad theme so if you could elaborate a little more?

A: In consumption we have typically been looking at the underpenetrated segments.

Reema: Which are the underpenetrated segments?

A: For example, vis-à-vis two-wheelers we have been more bullish on cars because the underpenetration in cars relatively is much higher than the two-wheeler segment. However, within the two-wheelers, we look at companies which have succeeded based on certain niche segments and have delivered consistent growth. So, broadly speaking, while consumption will remain a theme, we would then pick and choose the segments which are relatively still underpenetrated and have much more leeway to grow in terms of per capita consumption.

Reema: So car is one, any other segment in consumption?

A: I would say that the NBFC space is also linked to consumption whether it is in terms of durable financing, car financing, auto financing, loan against property, personal loans, etc. these are segments which are still underpenetrated. So, that can continue to grow for a while.

Latha: Is there money to be made in bonds in 2017?

A: Yes. Probably not as much as in 2016, but still there is some juice left. We do expect a couple of rate cuts in the next year which would leave some juice n the bond markets too._PAGEBREAK_Reema: You spoke about a downside in the markets in the next few months. How much could it be if you had to make a guess?

A: It is very difficult to guess because it is not only a function of our local factors, but also a lot of moving parts globally. We have the new US President coming in and probably announce a major shift in policy direction that we have seen compared to before. You also have the French election in the middle. And the biggest issue is that the dollar continues to rally, the yuan continues to weaken. So, there are a lot of moving parts. Probably difficult to put an absolute number but if things do not get “too destabilised”, I would say maybe 5 percent is what we are looking at the max, as far as India is concerned.

Latha: Would you bet on the IT-pharmaceutical variety, those that are exposed to the US markets or the global markets?

A: Let us look at the two of them separately. IT, we have been structurally not so bullish on because we see that the segment has grown to a size where it has run into a growth wall to say, saturated. So, against the 15-20 percent growth sector, it is probably now on 10-12 percent growth. So, it is a sector one would hide when one is not so bullish on the market, but not really take a five year view on unless there is some disruption in the business model by the big companies. And in pharmaceuticals, I do not think we still pass the Food and Drug Administration (FDA) general issue that has been plaguing a lot of the big and small companies. So, again, with the fact that the new President is likely to keep a pressure on drug prices, that is another sector we are underweight on, I would say.

Reema: Why do you think the weakness in our markets could be only in the early part of the year because if the dollar continues to strengthen -- so, why do you believe we need to be cautious only in the first half or the first quarter?

A: First quarter is a couple of events. One is the fact that our view that not all the negatives of demonetisation slowdown have been factored in, that is the local factor and we have to wait and watch what the new regime in the US shows us in terms of policy direction. So, these are two clear visible points that one needs to take care of in the next three-five weeks so to say. So, that is the reason why we are saying that for the first quarter at least, one needs to be cautious and then, if things do not pan out as bad as one expects them to be, then probably it is time to start building ones portfolio because markets have corrected significantly, some of the stocks in the consumption space, in the financial space are already down 30-35 percent. So, value is beginning to get created in the market. So, it is time to start building a portfolio when there is negative news I would say.

Latha: Reema asked you this question, but I just want to persist with it. The market is perilously close to 8,000; 8,029. What is the kind of downside? We have a Budget hope to support us perhaps, but nevertheless how much can it go in January itself?

A: As far as the broad index like Nifty or Sensex is concerned, we are looking at 3-5 percent earnings cut. So, that is the kind of downside.

Latha: Earnings cut, but before the Budget, can the Nifty go to 7,500-7,600 or do you think that most of the bad news is already there?

A: I would not be surprised if they touch those levels because foreign institutional investor (FII) flows continue to be negative. Even this late in the year, one would have assumed that after December 15, when people are supposed to go on vacation globally, one would see a slowdown in the negatives. So, that is something which has not yet happened. So, that is a bit of a surprise I would say. The good thing of course is that local flows are very robust. Insurance companies, mutual funds, etc. continue to get inflows and that is what is keeping the markets up. The question to ask is if the market continues to not deliver for the next couple of months also, then will the local sentiment continue? So, that is the moving part.

Latha: That is actually the question I wanted to ask you. How have the flows been at your end so far? Has anyone been disappointed by the market performance?

A: No, not really. Our investors tend to be long-term investors. We get regular renewal premiums and all that, as far as insurance is concerned. And even on the mutual fund side, we have seen systematic investment plan (SIP) books are quite robust. I do not think people are cancelling their SIPs or anything like that. So, that momentum should continue. The Rs 3,000-6,000 crore per month that we get in SIP and insurance products put together, should continue.

Reema: The Budget, we are expecting some kind of sop, some kind of stimulus. Ahead of that, is there any particular sector or stock that you would recommend a play on because the government could look at the elections, etc and then decide to come out with some kind of sops and stimulus?

A: My guess is that the Budget will probably have, as you rightly said, some kind of a mass bias, so to say. So, you may see announcements, the usual announcements in terms of mass housing, rural housing, etc. So, those are the segments one would play on and that means -- it is mostly in the midcap space, small construction companies, mid-sized construction companies, people who will execute that. I do not think it will make a huge demand to cement consumption because cement consumption is still predominantly driven by rural housing and that is not going to pick up in that much of a hurry, so to say.