Markets should follow the growth in corporate earnings. At the same time, I do believe that there is relatively lesser room for valuations to expand, Vaibhav Sanghavi, Co-Chief Executive Officer - Avendus Capital Public Markets Alternate Strategies, said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpt:
Q. What is your outlook for the coming year?
A. 2018 was an eventful year with numerous moving variables leading to heightened volatility. While we have seen many of those important macro parameters such as oil prices, bond yields, liquidity and global factors coming back in favour, we will continue to see a regular flow of new and macro developments (including politics and global markets) hitting the market in the first half of 2019.
The coming year thus would be a tale of two halves, wherein in the first half, the uncertainty is likely to prevail, leading to the better, predictable second half.
From the global perspective, markets would be looking forward to an amicable US-China trade deal and watch out for any potential growth scare (partly reflected from weakening economic data from Eurozone and US) and the effect of withdrawal of QE (quantitative easing) programmes on various asset prices.
While these events will keep the global and local volatility elevated, markets are likely to reward the prospects of improving corporate earnings in the longer term.
Thus, barring potential binary events like general elections, I am positive on the markets led by better corporate profits.
Q. After a straight 0-3 loss for BJP in Assembly elections, do you see Modi’s popularity going down? Will it be tough for Modi in 2019?
A. It would be naive to arrive at any conclusion if we try looking at the prospects of general elections from a prism of recent results. India is a robust, diverse and complex (in terms of assessment) democracy which makes it extremely difficult to arrive at any inference.
This is also evident from the kind of results which came in 2004, 2009 and 2014. Thus, rationality would suggest that we wait and see how the power of democracy is exercised, and then evaluate the subsequent outcome.
Q. Is market pricing in Modi returning to power in 2019? If not, then in case Congress come or we have a coalition government, do you think we could see more pressure?
A. It is futile to delve in these kinds of permutations and combinations because in the past instances of changes of governments, the long-term return on equity as an asset class has been very good.
While the short-term sentiments can be affected, as I mentioned earlier, markets over a longer period will look at the growth in the corporate profits.
I believe that we have seen the bottoming of corporate profits. Thus, as a fund, we generally do not take any big directional bet going into these kinds of binary events.
Q. What are your target for 2019 for Sensex or Nifty and why?
A. Markets should follow the growth in corporate earnings. At the same time, I do believe that there is a relatively lesser room for valuations to expand.
Regarding the growth estimates, while the consensus is north of 20 percent, I would be happy to see consistent growth of 15 percent for the next three years.
Q. It looks like the government will doll out certain populist measures ahead of the polls to set the stage for the big day. Do you see this as a concern for D-Street?
A. I would look at this slightly differently. GDP growth is a result of consumption, investment (private and government) and net exports growth as main components.
In the previous four years, we have witnessed increased capex from the government, giving a fillip to the robust GDP growth. What D-Street would be happy to see is the continuity and consistency of GDP growth with broader fiscal discipline.
If the growth is a result of higher consumption along with growing traction in private investment, maybe as a result of populist measures, I don’t think it is any reason for concern.
Structural reforms like GST and Bankruptcy law have laid the basis for consistent growth for many years to come and investors (global and local) will continue to remain confident.
Q. How is rupee likely to move in 2019? Are there any factors which one should watch out for?
A. In terms of REER (Real effective exchange rate), we are still overvalued. Ignoring the short-term movements, I believe that INR should largely be stable with short-term strengthening moves in the mid-year, led by weak economic data from developed markets.
However, one should watch out for the US-China trade deal, crude oil prices and QE tightening effect on asset prices including that of emerging markets.
Q. After the recent correction, do you think much of the froth is out and investors can again look at the mid and the smallcaps in the year 2019?
A. We generally see that heightened volatility does not favour the broader market. The reason being investors would want to take exposure to liquid largecaps for safety, should things turn another way.
In the coming year, looking at the prospective events, we can be sure of higher volatility. That said, in the past year, some amount of froth has gone out. Valuations on the mid and smallcap, though still expensive relative to long-term average, may start looking attractive after the big events.
Q. Top five stocks/sectors you think are good buying ideas with a target price for the year 2019?
A. Our preference continues to remain for sectors such as banking and financials, consumers and industrials.
Q. What is the mood of FIIs? Do you think the recent friction between the government and the RBI will lead to some loss of credibility and weigh on sentiment?
A. FIIs currently are on the sidelines and whatever flow we are seeing is as a result of passive investments in terms of emerging market flow.
The current stance is as a result of the upcoming elections, and not due to the recent RBI developments, wherein global investors would want to wait for the results and then take a fresh call.
With regards to RBI, my sense is that the wider debate on various issues which are currently prevalent will lead to a constructive and a positive outcome, and this will showcase the robustness of our institutions.
Q. Do you see RBI moving to a more dovish stance and a rate cut in 2019?
A. The stance is a result of inflation expectations amidst other variables. The inflation numbers have been very steady, with the forecast being revised down. And, since the MPC is inflation focussed, there is a higher probability of the stance turning dovish.
Q. You have recently touched the $1 billion mark in terms of AUM in your Hedge Fund, the largest in India. What has been your strategy given the current volatility in the markets?
A. The flexibility in our approach to the changing market conditions gives us a superior edge to deal with the volatile markets. In the recent turbulent markets of the past few months, we have used various tools to protect and hedge the portfolio including cash calls.
It is our aim to deliver risk-adjusted returns across all our products, which comes to fore especially in these turbulent times.
Q. What are the regulatory changes you are looking at in the AIF Cat 3 space in 2019?
A. AIF Cat 3 space has seen very encouraging growth. We do believe that this pool of investments has the ability to aid the journey of Indian markets from emerging to a developed one, by making markets liquid and aiding price efficiencies.
From a regulatory perspective, we look forward to being treated with parity with respect to tax laws with other investment vehicles.
AIF Cat 3 has the potential to offer differentiated strategies to investors, as well as create big job opportunities for which we look forward to working constructively with the regulators.
I would take this opportunity to wish your readers a very happy and a prosperous upcoming 2019.
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