We expect some volatility around the budget as elections are a year away and major announcements will have some impact.
The risk-reward favours the largecap stocks because during the last 5 years the absolute returns of the mid/small caps have been considerably more than the large caps, Abhijit Bhave, CEO, Karvy Private Wealth, said in an exclusive interview with Moneycontrol’s Kshitij Anand.
Q) What should be the ideal portfolio mix -- large caps, index heavy stocks or mid and small caps at a time when the market has already rallied by about 25%?
A) An optimised portfolio mix results in overall risk reduction and lessening of the volatility. Generally, in a bullish scenario, small and midcap stocks tend to outperform the large cap peers while in a bearish scenario they tend to lose more.
In the current market scenario, the risk-reward favours the largecap because during the last 5 years the absolute returns of the mid/small caps have been considerably more than the large caps while the EPS growth for the mid/small caps had been proportionately much less than the large caps.
The thumb rule for portfolio mix which can be followed by an investor is 70 percent allocation to large caps followed by 20 percent in midcaps and 10 percent in small caps.
Q) Work on Modi Sarkar's last full Budget has already begun. What are your expectations from the big event, do you think we will see a populist budget this time around?
A) Rural growth, job creation in the economy, impetus on affordable housing, infrastructure development, will be the primary focus of the Government in the ensuing budget on 1st February.
We expect fiscal deficits to be maintained around 3.2 percent, though Government may go for higher disinvestment targets in FY18/19.
On the direct taxation part, both the Corporate and Individual can expect a sweet serving in the forms of lower taxation rates. Sectors which may benefit the most are the companies carrying the agriculture & infrastructure themes.
Q) What would you have done if you were the finance minister? What would be on your priority list?
A) The transitory effects of demonetisation and implementation of GST have affected the economic growth in the short-term and visibly affected business sentiments though we believe it will prove beneficial in the long-run.
Honourable Finance Minister needs to make some positive announcements to build the confidence of the business community and ensure a stable business environment for next couple of years without any further disruptions.
Q) It has been a splendid run for markets throughout 2017. What are your expectations for the year 2018? Any big events which could derail the equity rally or market participants will be in a wait and watch mode ahead of general elections?
A) We can expect some inflationary pressure in the near-term on account of higher crude prices which could create some minor problems in the short term.
We expect some volatility around the budget as elections are a year away and major announcements will have some impact. Further, geopolitical risk can never be predicted, but any serious encounter between North Korea and the US may have a negative influence on the markets.
Q) The September quarter results were not that bad, in fact, there were more positive surprises than disappointments. Do you think we could see a double-digit growth in FY19?
A) The earnings of the India Inc.’s for the second quarter of FY18 was in line with market expectations, with more hits than misses supported by improved operating profits, broader earnings mix, the only exception being the oil marketing companies.
Expectations of earnings recovery are on the cards with support from the rural consumption revival and the faith in the domestic consumption theme and a key beneficiary of any such positive movement would be the Banking, Financial Services, and Insurance (BFSI) sector because of the inter-linkages.
Sectors like automobiles, auto ancillaries, housing finance companies, utilities which have delivered good earnings growth will continue to deliver decent earnings growth, while some of the sectors like health care, the metal pack which has languished will start contributing, thus resulting in double-digit earnings growth.
Q) You would not comment on stocks – so any sectors which are looking attractive or a possible play in 2018-19?
A) In continuation to the above, we can add, that as we see the demand reviving, the excess capacity will be utilized and profits will increase for the companies, as there in no capital expenditure required.
Lower interest rate scenario, stable macroeconomic environment, supported by structural reforms like Demonetisation, GST implementation, RERA, Insolvency and Bankruptcy Code (IBC) will provide the necessary tailwind to the market, thus foreseeing better earnings trajectory than the previous two years.
A sustainable hike in minimum support prices (MSP) for agriculture products, big bang announcements like an infusion of INR 2.1 lakh crore into Public Sector Banks, INR 7 lakh crore capital expenditure on roads, power transmission in coming 5 years, housing for all by 2022 will provide the necessary impetus to the sectors like, steel, cement, construction, housing finance companies, consumer durables & financial services.
Q) What is your call on PSU banks? Yes, there are a lot of policy measures initiated by the government but there are a lot of moving parts to the story as to how things will shape up eventually?
A) Rising NPAs and higher provisioning had led to a capital shortage for the PSU banks, post recapitalisation this will be done away with thus effecting an easy credit condition in the economy.
The recapitalisation plan for the PSU banks will help them to extend additional loans, which will gradually lead to the recovery in the capex cycle. Any revival of growth would require healthy banking system which an extend credit.This is very important since PSU banks have a majority share in total loans and advances for the corporate sector.
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