Earnings will be key while mid and smallcaps look better than largecaps

A) 2018 started off on a positive note, with most global economists’ and strategists’ expectations of a “synchronous global growth” with both Developed Markets and Emerging Markets showing signs of growth.

However, the China-US trade conflict last year impacted global investor/business sentiments due to the impending uncertainty on global trade.

We believe that global growth is showing signs of a slowdown. In response to that, central banks have not only reduced their pace of QE withdrawal but may now consider rate cuts as well versus expectations of rate hikes previously.

While the global slowdown may impact the export growth for Indian companies, there are signs of a domestic slowdown as well across sectors like two-wheelers, passenger vehicles, tractors, commercial vehicles and airline passenger traffic, to name a few.

This may delay the earnings growth expectations by a quarter or two. Investors having a long term view should take the current volatility (driven by elections, demand slowdown and quarterly earnings disappointment) as an opportunity to add to quality names.

A) From a pure valuation standpoint and on a relative basis, mid and smallcaps continue to trade at a premium when compared to largecaps. Hence, there is room for some disappointment if the earnings for these companies do not come through.

We would, therefore, advise investors to consider a diversified portfolio which has a good mix of large, mid and smallcaps.

One can invest in small/midcaps through the SIP route to mitigate the volatility and the risk of a sudden shock in the market.

A) The rupee has appreciated versus the USD in the past three months, led by strong FPI flows both into debt and equity.

At Rs 68.5 to the US dollar, the rupee is near its fair value in Real Effective Exchange Rate terms (in fact ~2 percent premium). We expect it to stay around these levels going forward.

From a long term perspective, one can expect a gradual depreciation of the currency in line with our inflation differential with other countries within the trade basket.

A) In the run-up to the elections, sectors such as consumption and infrastructure tend to be in the limelight. We are constructive on financials, healthcare and infrastructure sectors.

A) Geopolitics, oil prices, US-China trade talks, foreign and domestic flows in both equity and debt, policy environment in India and earnings growth will be key factors to watch out for in FY20.

The recent rally in Indian markets has come despite no change in earnings, which makes it even more important for us to focus on corporate earnings growth.

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