Earnings growth has been recovering, but we expect it to accelerate from H2FY19 onwards, and this should be the key driver for markets in 2019, says Sampath Reddy of Bajaj Allianz Life Insurance Company
The Budget may cause some volatility in the near term, but we feel that the impact (if any) will be more short-term in nature, and the markets will move on to more fundamental factors, Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance Company, said in an interview with Moneycontrol’s Kshitij Anand.
Q. What is your expectations from the Interim Budget? Do you see this as nervousness ahead of the main event?
A. The budget may cause some volatility in the near-term, but we feel that the impact (if any) will be more short-term in nature, and the markets will move on to more fundamental factors.
Earnings growth has been recovering (albeit slightly below expectations), but we expect it to accelerate from H2FY19 onwards, and this should be the key driver for markets in 2019.
Earnings growth over the past few years was primarily driven by domestic consumption sectors. But, we expect that growth will be more broad-based in 2019, and also that the capex cycle (which has been the drag earlier) is now bottoming, and will see a gradual recovery during FY20.
Q. The upcoming interim budget will set the tone for the elections and poll promises in the next few months. What are your views?
A. Focus on agriculture sector: The upcoming budget is expected to have a greater focus on agriculture sector due to some distress seen in the sector, and it being an election year. There is the possibility of a nation-wide direct farmer support scheme, or another farmer/agriculture welfare schemes.
Revival of capex cycle: Also, even though the government’s finances are presently tight, it plans to revive the capex cycle over the long term. Niti Aayog, the government’s think-tank, has indicated that increasing the investment rate as measured by Gross Fixed Capital Formation (GFCF) from current levels of 29 percent of GDP to 36 percent of GDP by 2022-23 is a key step in achieving a higher GDP growth of 9 percent (and above) in the future.
Therefore, even though the government may not significantly increase capital expenditure in this budget (due to fiscal constraints), it may announce some long-term measures to help revive the capex cycle.
Fiscal Slippage: We may see some minor fiscal slippage due to some populist measures (which is typically seen ahead of elections), and also due to lower GST collections, but we do not expect a major impact of the same in the long term.
Q. What are your views on the two IT biggies which have come out with their results – TCS and Infosys? Which one are you recommending to your clients?
A. We have been liking the IT sector for quite a while now, and it has benefited our portfolio. The sector is benefiting from strong corporate earnings growth and positive deal-winds. Also, valuations still appear to be quite attractive.
Q. Any bright spots in the stock universe that you think could turn out to be a multibagger in the next 3-4 years?
A. We continue to like well-run private sector banks and NBFCs due to their good asset quality and healthy credit growth. Pharma sector, which was struggling due to the US FDA issues and weak pricing for generics, seems to have bottomed.
We are incrementally turning positive on capital goods, on expectations of a capex turnaround as the industry capacity utilisation levels are inching towards optimal. We also like IT services sector for its attractive valuation, strong earnings growth, and healthy/positive deal-wins.
Q. Most experts are suggesting that the big underperformers of 2018 such as midcaps as well as banking space could turn fortunes for investors in 2019. What are your views?
A. We have been preferring the large-cap segment since the beginning of 2018, on a relative valuation basis. Although, we still like the large-cap segment, but with correction seen in the small/mid-cap segment, some good selective bottom-up opportunities have also emerged in this space.
In the financial sector, we continue to like well-run private sector banks and NBFCs due to their good asset quality and healthy credit growth.
Q. Should investors put their money in mid-cap and small-cap stocks ahead of interim Budget or wait for the full budget in June-July?
A. It is difficult to exactly time the market, but as mentioned earlier, with the deep correction in the small/mid-cap space for most of 2018, we have seen their valuation premium come down compared to large-cap counterparts, and therefore we see selective bottom-up opportunities in this segment.
We had also advised investors to allocate some portion of their portfolio to mid-cap funds in late October 2018, after the sharp correction was seen in September 2018.
Investors should note that small/mid-cap segment may see volatility in the short term, but have rewarded investors well over the long term.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.