There may not be any euphoric movement or over-optimism in equity market ahead of the general elections scheduled in May, believes Nimesh Chandan, Head-Investments (Equities) at Canara Robeco Mutual Fund.
In a chat with Moneycontrol, Chandan said the market reacted negatively to UPA1 winning the elections in 2004, while in 2009, the market hit an upper circuit on UPA 2 win, but equity markets had less than average return until 2013.
“Since the last elections saw an outcome that was not seen by India in over 30 years, investors are also not expecting a repeat of the same. Hence, we are not experiencing any euphoria or over-optimism towards the event,” Chandan said.
Canara Robeco Mutual Fund is a joint venture between Canara Bank, India and Robeco Group, Netherlands. As of end-December, Canara Robeco MF managed average assets of Rs 13,656 crore.
Chandan has been with Canara Robeco MF for over a decade. He started as a senior fund manager managing domestic equity funds and later moved to set up and head the offshore investments division for the fund house. As Head- Investment (Equity) now, he actively guides the equity team in providing a strategy for various funds.
Speaking about mid and small-cap companies, Chandan said, while Nifty ended the last year in the positive, there was a significant correction in the mid-cap and the small-cap space.
Post elections, he expects the focus to shift to business and economy which would help recovery in the mid and small-cap companies.
“For 2019, we have a major event left to cross, the General Elections. Post that the focus should ideally come to business and economy. We expect mid-caps and small-caps to see some recovery," Chandan said adding that in the second half of the year, he expects value and growth could be the driving factors ahead of quality.
On the fund house’s investment strategy, Chandan said the significant correction of the small-cap segment in the calendar year 2018, and the expected heightened volatility leading up to elections, has presented significant investment opportunities in the small cap space.
Currently, for many small-cap companies, the valuations are at a level, which makes the risk-reward matrix attractive, he said.
Chandan feels SIP is a good investment approach that brings discipline in investing and generates good returns over a longer term.
He believes when investors are over-confident about an outcome, there is a scope of a surprise that creates more volatility. Being risk-aware is good.
He feels investors will move with caution towards the elections and the near term movement of the market will be guided by that behaviour. However, investors who look at long-term data will feel a bit more comfortable.
“Long-term studies have shown that India Equity markets have delivered good returns to the investors, despite changes at the Centre. If investors can keep their nerves during the short-term volatility, such events can provide an opportunity for good long-term investments,” Chandan said.CORPORATE EARNINGS
A majority of the companies that declared results so far have either met or exceeded expectations. Considering the market sentiment currently, Chandan believes the attention, however, is focused on the companies that have missed the estimates.
“We have seen good results from many consumer companies (except auto sector); IT companies have given good results considering the macro set up; and private banks have delivered good numbers with continued healthy growth on the retail lending side and lower slippages on the corporate side of the business,” Chandan opined.
He further added that the next two years will see an acceleration in the earnings in the large-cap companies and expects the overall Nifty earnings to grow close to 20 percent compounded for the next two years.SECTORS
Given the improvement in business and earnings growth, the fund house is betting on the banking sector, particularly private banks.
“The credit growth has picked up and the worst of the NPA cycle seems to be behind us,” Chandan said.
The fund house is also upbeat on the consumption sector on the back of healthy growth. “The structural story on the consumer demand front remains intact. We expect consumer companies to benefit from initiatives taken by the government in terms of welfare schemes as well as GST implementation,” he said.
With the rising capacity utilisation across industries and comfortable interest rate environment, the fund house envisages a pick-up in capex cycle in the coming year.
“We are already seeing some improvement in order books of engineering and construction companies," he added.RUPEE, CRUDE OIL
Considering the recent commentary by the Federal Reserve Chairman Jeremy Powell and worries of a slowdown in the US economy, the fund house expects a reduction in the pace of rate hikes, which should also reduce the chances of sharp increase in US dollar.
Chandan added that investors have turned more favourable towards emerging markets and there is improvement seen in EM equities, bonds and currencies which should keep the Indian rupee range bound in the near term.
Last year, oil moved to a four-year high in October and then corrected to an annual low in December. He believes, in a scenario that major global economies experience a slowdown by the end of the year, the chances of oil prices rising sharply are low.