The earnings growth is still not broad-based and the economic slowdown will have a larger impact on mid and small caps. Hence, we will wait for better entry levels for small and mid-caps, Prasun Gajri, CIO, HDFC Life Insurance, said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpts:
Q) Despite the rate cut, growth is still a worrying sign for investors. Do you think RBI should have done more in its policy meeting to push growth and investment?
A) We believe that RBI has done what was needed. Cutting rates by 25 bps and shifting the stance to accommodative means adequate monetary stimulus has been provided.
Moreover, it is also focussing on the transmission of the rate cuts and to that end, the 'accommodative' stance and the liquidity support will help.
We do not believe that monetary policy driven stimulus is the panacea for the slowdown impacting the domestic economy.
Support has to come from both policy reforms and fiscal stimulus for the economy to recover from this phase.
Given that there is limited fiscal room for the government, it will be interesting to see the policy options the government decides to take.
Q) Skeletons are coming out of the closet for NBFC sector. DHFL, the latest case, has not only worried its equity investors but also debt funds. How safe do you think are debt funds in the current scenario?
A) Given the current issues with NBFC's, there could be some risk aversion and investors could move away from debt funds. However, we believe that this will be a temporary phase.
Investors should take cognizance that if higher yields are expected from certain categories of debt funds which come only through higher risk-taking then occasional credit loss can happen.
It is to be noted that not all kind of debt funds have been impacted and the larger part of the debt fund universe continues to do well. Therefore, we would not want to call debt funds in general unsafe.
Q) When the market hit a record high valuations were a concern. Do you think investors have got the reason - deteriorating macro and NBFC crisis to sell into this market? What is the bottom you reckon?
A) The current market valuations are higher than the long term averages. However, these valuations have to be seen in the context of improving earnings growth trajectory where the market is expecting high-teen earnings growth over the next 2-3 years.
However, in the short-run, the market has to contend with slowing economic growth, ongoing NBFC crisis and deteriorating global macro driven by trade wars.
This is countered by the optimism over the new government taking steps to reinvigorate growth, rate cuts by RBI to spur the economy and the improving health of the banking system. Given this, we believe that the markets are likely to be range-bound for some time.
Q) With Modi 2.0 the voice of midcap and small caps outperforming large caps grew louder. Do you still feel that the broader market could outperform?
A) Given the uncertainties mentioned earlier, the risk-reward ratio continues to favour the largecaps.
The earnings growth is still not broad-based and the economic slowdown will have a larger impact on mid and small caps. Hence, we will wait for better entry levels for small and mid-caps.
Q) What would be your advice for anyone constructing a portfolio now? Are there any sectors where investors should limit their exposure?
A) We believe in creating and sticking to a well-diversified portfolio with an objective of doing well over the medium to long term. The current circumstances are no different.
Currently, we are positive on private banks, select capital goods, and cement stocks along with select PSU's, especially in power space. While we are underweight on consumption in general, we remain overweight on specific stocks in the FMCG and auto space.
Q) Auto sector has been on the sell list of both MFs and FIIs, what are the factors that contributed to the underperformance? Do you think the sector could emerge as a dark horse in the next 12-24 months?
A) The demand slowdown in the sector has been sharp and more than that anticipated by the market. While various causes have been ascribed to the slowdown, it is difficult to ascertain what led to this slowdown and what will help in the revival of the sector.
It is too early to say if the sector is a dark horse as there is no visibility on when the situation is expected to turn.
However, the sector has seen a sharp price correction and any pick-up in demand could see a short-term pullback.
Any longer-term performance will require the market to be convinced of the robustness of the demand over the next 12-24 months.
Q) Do you think green shoots of growth were visible in the March quarter? What stocks surprised or disappointed?
A) The overall earnings are in line with the expectations. The earnings recovery was led, as expected, by the financial sector.
While sectors like IT did well, consumption-driven sectors exhibited a slowdown and lower than expected growth in some cases. Cement and capital goods stocks also did well during the quarter.
Q)Do you think the current market rally, which saw a 10 percent growth in 2019, will continue amid rising concerns around NBFCs, global factors such as trade wars and shrinking liquidity?
A) We are in a range-bound market for some time. Over medium to long term, we remain positive that earnings growth over the next 2-3 years will accelerate and hence will drive market performance.
Q) How do we fare among Emerging Markets? The rupee has been stable but FIIs have started taking money off the table. What positioning does India have among the portfolio of FIIs investors?
A) The global macro-economic environment continues to be uncertain on account of the US-China trade war and the overall growth slowdown.
In this global context, the Indian market has been doing well and has been attracting flows as this is one of the less affected markets on account of the current global situation.
It is possible that this trend continues. However, it is extremely difficult to predict the direction of FII flows. As an example, 2018 was a year when the FII flows were negative and the trend has reversed this year.
Overall for the Indian market, it is important that the domestic flows sustain and balance out any volatility driven by any FII outflows.
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