'Global liquidity to shift from largecaps to mid-small caps if economic condition stabilises convincingly'

"We believe, in the absence of strong GDP growth, falling private consumption growth and higher financial sector uncertainty, much of this liquidity has sought the safety of quality largecaps. For this to reverse, we need domestic economic conditions to stabilise convincingly," Kartik Soral, Senior Fund manager Equity at YES AMC told Moneycontrol's Sunil Shankar Matkar.

Q. As we are in the last week of the December quarter earnings season, what are your thoughts and does the season indicate any recovery given the government measures? And, should investors be worried about the coronavirus outbreak?

A. Q3FY20 earnings so far have broadly been reflective of the economic slowdown, with most of the non-financial companies finding it difficult to deliver significant sales growth.

We believe, this is in line with market expectations. However, this quarter has generally seen higher operating profit margins suggestive of benign raw material prices and also of some cost-cutting measures taken by the companies across the sectors.

Bottomlines have further been aided by the corporate tax-cuts announced later last calendar year. Lower operating costs suggest higher efficiency on part of corporates – which is positive. For banks and financial companies, it has been a mixed bag – lower loan growth and slightly higher retail slippages have been balanced by lower interest costs and higher recoveries.

Coronavirus has caused reasonably big damage within China leading to more than 1,000 deaths. This number now exceeds that of the last major virus break out (SARS).

Moreover, it has led to many provinces in China going in to complete lock-up. Given that China accounts for almost one-fifth of world GDP and more than quarter of world’s GDP growth, it is surely a cause of concern.

Q. What are those sectors/stocks that will benefit from the fast-spreading coronavirus which has forced shut down of several manufacturing plants in world’s second largest economy China?

A. China has been a major driver of global trade with many direct or in-direct linkages to global supply chains. Therefore, we believe, the coronavirus threat to world markets cannot be over-stated. Although there may be temporary shift of trade away from China, we are still not completely sure how is it going to impact the businesses in India over the long term.

Q. What should be the portfolio strategy of investors post-Union Budget 2020 sector-wise?

A. Budget 2020 aims to increase the productivity of the economy through wide-spread infrastructure push and at the same time attempt to increase the disposable income through new income tax regime. Agriculture has been another sector which has gained much from the budget.

Apart from this, there have been few other direct sector-based incentives in the budget. In such a scenario, it is imperative to base portfolio on a sound bottom-up approach rather than a simple top-down sector based approach.

Q. Will the market remain rangebound in coming months given the rally seen since September 2019 after government measures? Does that mean it would be a market for mid-smallcaps than largecaps?

A. Our markets have gained on two fronts — firstly, from the obvious push by the government in form of corporate tax-cuts, and secondly from the higher global liquidity since September-October 2019 (US Fed Balance Sheet expansion) which has led almost all major global indices higher. While the former has led to higher bottomline for most companies, latter has led to higher valuation multiples.

We believe, in the absence of strong GDP growth, falling private consumption growth and higher financial sector uncertainty, much of this liquidity has sought the safety of quality largecaps. For this to reverse, we need domestic economic conditions to stabilize convincingly.

Q. Will FY21 be a strong year for banking and financials and consumption stocks especially after government’s focus on economic revival?

A. There has undoubtedly been a focus on economic revival. However, as discussed, current structure of the markets does not allow us to take a simplistic top-down view of the markets.

Q. Do you expect major rate cut transmission this year after the Reserve Bank of India (RBI) indirectly asked banks to cut lending rates?

A. We believe, the RBI has taken some very good steps in the last MPC meeting to ease liquidity to critical sectors of the economy. These decisions should lead to a much better rate transmission and credit growth going forward.

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