After the Indian economy's bumpy ride in 2019, Mirae Asset Mutual Fund's Chief Investment Officer Neelesh Surana believes the four quarters of 2020 may bring some gradual improvement in company earnings.
"The gradual improvement will be based on four reasons—favourable base, directed measure by the government to iron out sector specific challenges, likelihood of decent rabi season, and full impact of low interest cost," Surana told Moneycontrol.
Interest rate is the most important lever which is supportive for market as fall in interest rates improves demand, improves profitability, and re-rates the P/E ratio (price-to-earnings ratio) multiple with other factors remaining same, Surana said.
Price to Earnings or P/E ratio is the ratio of company's current share price to its earnings per share. It gives an idea of what the market is willing to pay for company’s earnings. It also indicates how the stock is valued in the market.
He feels, at an aggregate level earnings grew only 4 percent CAGR (Compounded Annual Growth Rate) during the last five years.
Compound Annual Growth Rate (CAGR) indicates the compound growth rate of the amount invested over a specific time interval. It is used to indicate revenue growth or decline of a company over a period of time.
“At 18x forward PE multiple, we believe that the markets are still within the boundaries of reasonable valuations, given that earnings is low compared to long term average, given that the PAT/ GDP at 3 percent is at a 15-year low,” Surana said.
However, he feels, from a long-term viewpoint the drivers to growth are intact because of favourable demographics and potential in infrastructure.
“Overall, we believe that valuations are reasonable and investors can expect 13-15 percent returns,” he said.
On the question of whether investors should be worried about the Coronavirus outbreak, Surana believes that it is an evolving situation and an early resolution is important to prevent second order impact on demand and supply chain.
The fund house is betting big on sectors that are yet to meet to their long term potential.
"Profitability in corporate banks, capex-related businesses, real-estate, automobiles, telecom, and pharmaceuticals sectors are much lower than the long-term potential but the growth drivers are intact in these sectors," Surana said.
On the rationale behind fund house’s equity portfolio being tilted towards consumer discretionary sector despite the slowdown faced by the FMCG companies, Surana said: "It is always better to pick stocks when the going is tough (eg. consumer discretionary now), as the valuation is in favour. We believe that only the near term earnings are impaired, but the long-term potential in the space is intact."
Given the ongoing credit issues in NBFC, Surana feels it is best to avoid weaker names (particularly on liability franchise) irrespective of valuation.
The fund house is positive on select NBFCs which have differentiated lending book, strong liability franchise and are at reasonable valuation.
Mirae Asset MF continues to remain deployed in sync with the view of not generally taking cash calls and cash levels are generally below 5 percent, Surana said.
Presently, large-caps (Nifty50) is trading at 17.5 times one year fwd. earnings, which is at a slight premium to historical 10 year average. While, midcaps (Nifty Midcap100) is trading at 16 times 1 one year fwd earnings, which is at a discount to its historical 10 yr average, according to Surana.
"We believe the divergence in valuations where good quality companies with good earnings visibility are trading at a significant premium to their historical average should mean revert with earnings visibility coming in other bucket of value stocks in line with improvement in overall GDP growth," he added.
Surana also feels investors should allocate a large portion (around 75 percent) to large cap funds and the remaining to mid cap and sectoral funds.
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