Pharma, IT, auto among 6 sectors that could see double-digit growth: UTI AMC

Another issue in focus is the US trade policy. We have to be mindful of the risk that it could tip over to a more protectionist scenario in which case the US takes up aggressive and wide-ranging trade action against China, while the latter takes significant counteractions.

Trade and investment growth in the US and China could be impacted from the spillover effects on the rest of the world, as two-thirds of international trade is through global supply chains.

The historical summit between US President Trump and the North Korean leader Kim Jong-un may have limited implication for financial markets in the near term.

Although the joint statement by the two leaders did set the stage for an easing of geopolitical tensions in and around the Korean Peninsula and could potentially lead to economic cooperation between the two Koreas.

Q: We have seen carnage in the small and midcap space with quality stocks falling in double-digits. Can one look for value buys, bargain hunt or should investor stay put as the valuation quotient still remains high with respect to largecaps?

A: On a year-to-date (YTD) basis, the Nifty Midcap and Smallcap indices are down 11 percent and 16 percent, respectively, compared to a 2.8 percent return for the Nifty.

If we look at 10-year average price-to-earnings multiples, the Nifty has traded at an 8 percent premium to the Nifty Midcap index. Despite this correction seen in the last few months, the Nifty Midcap index is trading at a 16 percent premium to the Nifty. The same stood at a 25 percent premium in January.

This suggests that despite the correction, mid and small cap indices are still expensive to their longer term averages. There are always pockets of opportunity across market capitalisation but my recommendation to longer term investors would be to draw up an asset allocation plan based on risk profile and stick to those plans.

Q: Corporate numbers for the March quarter were okay if not bad. Do you think global investors are just focusing on what is going to happen to the Bharatiya Janata Party in 2019 and upcoming elections in Madhya Pradesh and Rajasthan? A: Corporate earnings in Q4 FY18 has been below expectation when compared to estimates and a large amount of the miss has been on account of the financial sector and oil & gas. However, the next two-year consensus earnings forecasts continues to remain strong at over 20 percent.

Global investors do pay attention to elections and its outcomes do have an impact in the short run but they invest in for the ‘India growth story’. However, some amount of allocation is passive money where the fund manager is looking for diversification.

In an environment where global growth rates have improved and interest rates are hardening, the relative attractiveness of the Indian market has fallen. We should also keep in mind that our current account deficit has gone up partly thanks to rising oil prices.

This situation has also kept up pressure on the rupee. In the situation, it is natural that some outflow may take place in the short term. But if earnings growth takes place in coming quarters/years, money will also flow back.

Q: Do you think concerns over the banking sector are over especially after the recent meeting of interim Finance Minister Piyush Goyal? Does it make sense for investors to catch the falling knife? If not, which other areas in the financial space are looking attractive and why? A: At this point in time, we prefer private sector corporate lenders. Over the last 2 decades, private sector banks have withstood volatility in the interest rates and asset quality cycles and gained market share from their state-run peers.

Although corporate-oriented private sector banks have experienced stress in their loan book in the last couple of years, these banks are more towards the end of the stress recognition cycle.

Going forward, credit cost for these banks is expected to decline and may return to the normal rate of profitability. Hence, a re-rating is possible in case of corporate-oriented private sector banks.

Q: Apart from financial which ones will shine in 2018? The leaders of 2017 were metals and select autos. Do you think the dream run in these sectors is over? A: Nifty consensus earnings growth for the next 2 year is expected to be over 20 percent. Sectors like automobiles, consumer, financial, industrial, pharmaceutical, information technology as well as metals are expected to grow in double-digits.

The auto sector has been registering double-digit volume growth in the last few months in various categories like passenger vehicles, two-wheelers, tractors and commercial vehicles. Growth is being backed by improving affordability and financial penetration.

Indian IT companies have undertaken initiatives to transform their business models as digitisation of businesses leads to higher spend around big data, analytics, mobile, social media and internet. Ramp up of few large clients, coupled with cost optimisation measures, may lead to higher earnings growth in FY19 compared to FY18.

Pharma as a sector has underperformed the market in the last few years, partly due to issues related to the US Food & Drug Administration. There is a huge learning curve for some these companies in terms of USFDA compliance. We believe these companies are at the fag-end of their problems as far as USFDA goes.

We expect the pace of product approvals to improve going forward. India business, which is a bigger contributor to the profit pool for many of these companies, should also start to register growth as this side of the business has also faced difficulties in the last few quarters’ post-demonetisation and implementation of the Goods & Services Tax.

Q: Do you sense a red flag in global markets? A recent report suggested that the MSCI Emerging Market index saw a breakdown and is at a three-month low? Do you thing exodus by foreign institutional investors will continue? A: At the current juncture,, global growth is expected to remain strong at over 3.7 percent for CY18 and CY19, with the cycle being sustained by strong investment and improving productivity. At the same time, inflation is set to rise.

However, there are increased concerns about the strength and duration of the global expansion cycle. A variety of reasons have been cited as concerns.

The rise of protectionism risks, softening data prints in a developed market, a seemingly intense credit tightening in China and the recent adverse impact that rising US yields and an appreciating dollar would have on emerging economies.

FII outflow is not particularly about India, they have been cautious about other emerging markets. South Korea, Thailand and Taiwan are other emerging economies which have been facing outflows along with India. In India, there are concerns over rising crude price and US bond yields, dollar’s appreciation against the rupee, increasing current account deficit and slippage in fiscal discipline.

In the short term, these factors would make India relatively less attractive when compared to other markets. However, if we can deliver high teen growth in corporate earnings in coming quarters/years, we would continue to attract long term flows.