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'We like cyclical sectors due to low valuations and high risk premium'

"The divergence of the cost of capital between the have and have-nots has been unnerving."

December 31, 2019 / 10:25 AM IST

Banking and financial sector can continue to demonstrate strong performance, and may even surprise on the higher side in case IBC resolutions accelerate or growth capital becomes available from other sources, said Kartik Soral, EVP & Senior Fund Manager - Equity at YES Asset Management (India) in an interview with Moneycontrol's Sunil Matkar.

Edited excerpts:

Q: Do you expect the present momentum to continue in 2020?

A: We believe what is driving up the risk assets globally is the monetary policy regime and a tacit assurance by all major central banks that such regime of liberal liquidity and low interest rates will be in force till global growth and inflation are on sound footing. Further, the rally has further gained strength after significant improvement in US-China trade relationship recently which has also boosted confidence of risk assets.

We believe, Indian equity markets have also gained primarily because of these global factors and that these factors will continue to be most important for the Indian markets in the next year as well. However, the nature of the rally in terms of concentration of performance will be highly dependent on domestic factors like ease of business, rural economy, domestic consumption, credit flow and fiscal strength.

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Q: Banking and financial services led the charge in 2019 on the hope of easing NPA worries and likely strong growth going ahead. Do you feel the sector will retain its lead?

Over last year, there have been indications that the NPA situation for banks is gradually improving, which has translated into good sector performance. Further, some resolutions under Insolvency and Bankruptcy Code have also provided reasons to be optimistic on the sector. In our opinion, the sector can continue to demonstrate strong performance in this backdrop, and may even surprise on the higher side in case IBC resolutions accelerate or growth capital becomes available from other sources.

About 100 out of BSE500 stocks rallied 20-222% during the year. Do you feel there would be more wealth creators in 2020 than 2019?

In 2019, the domestic economy slowed down while global liquidity push resumed – this caused money to flow into the companies that were able to demonstrate the strength of their business model in these tough times. This was expected. However, the ferociousness of the rally in these companies versus the rest of the market has taken many investors by surprise.

The divergence of the cost of capital between the have and have-nots has been unnerving. For this to reverse and have other companies participate, we need to see domestic growth bouncing back from the levels we are currently.

Q: What are your thoughts about auto sector recovery and would you bet on the sector given the valuations?

A: The auto industry has been impacted due to multiple reasons such as higher insurance costs, regulatory changes leading to higher unit costs to the end-user, stagnant rural economy, slowing domestic consumption and quite importantly higher viscosity of credit flow in the economy due to health of our BFSI sector.

Some of these reasons are one time and will disappear in the near term which makes a good case for the sector given that the valuations have come down reasonably. However, other reasons for the slowdown are more structural and may need more time. Investors can go slow in deploying capital in the sector.

Most experts believe the RBI will maintain pause in February policy meeting as well. What are your thoughts?

Given the data on GDP growth (4.5%), IIP change (-3.8% YoY for Oct 2019), PMI and other industry data like factory output and the slowdown in investments, we believe RBI may reduce growth targets further by 10-15 bps. We also think RBI may not move in February as CPI has bounced back to over 5.5% on the back of strong food and commodity prices. We also think that given that spreads have remained high despite lowering of interest rates, we don't see the need to use up a critical policy measure hastily.

Q: What are major events to look at in 2020 as most experts feel the recovery is expected to happen in earnings as well as the economy?

A: On the domestic front, we are keenly looking for signs of a bounce-back in rural consumption, private sector investments and corporate sector credit flows and also for slowing down of NPA creation cycle in the financial services sectors. Therefore, apart from Union Budget which would be the key, we are also going to watch company management commentaries carefully.

On global front, monetary policy meetings for all major central banks like FED, ECB are important. Also, we would be following US elections to form our opinion on USD, tariff problems and foreign flows.

Q: What are sectors or themes to play in 2020 and which could give hefty returns than seen in 2019?

A: Given the low valuations and high risk premium, we like cyclical sectors like Capital Goods, Engineering and Infrastructure and even Auto Ancillaries. We also like turnaround sectors like Telecom.

Q: What are those factors that can spoil or derail the market momentum in 2020?

A: Low domestic consumption growth, financial sector contagion, very high inflation, the rollback of global liquidity, tariff war escalations, armed war-fares are key risks that we see for 2020.

Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sunil Matkar
first published: Dec 31, 2019 10:25 am

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