See earnings recovery in 2018; like consumption, insurance, PSU banks: Motilal Oswal MF's Gautam Sinha Roy

However, the fund has a cautious on IT, pharma stocks.

Speaking about the upcoming Union Budget 2018-19, Roy said that as we enter pre-election year, the course of government policies will become more important, particularly in providing fillip to economic growth be in terms of fiscal incentives to boost consumption or to incentivise productive capital deployment.

Below are edited excerpts from the interview:

How do you see the calendar year 2018 panning out for investors?

Roy: This year will be all about a tug of war between high valuations mean reverting and depressed index earnings catching up.

There has been a runaway rally in broader market, with Nifty500 Trailing PER at a long term high of 27X+. Market is clearly factoring in a sharp improvement in earnings, and whether that happens in CY18 is the big question. Still given the depressed base of earnings it makes sense to be hopeful about an earnings recovery.

While interacting with your clients have you got a sense that the political equity has reduced or there is a sense that the reforms are good? Also, What are your expectations from Budget 2018? Would this time be populist one or would this time be a reformist one from the Modi government? 

Roy:It is clear now that as we enter pre-election year, the course of government policies will become more important, especially in providing fillip to economic growth be in terms of fiscal incentives to boost consumption or to incentivize productive capital deployment.

Rural productivity improvement measures and affordable housing are two areas which one remains most hopeful about. While a lot has been done, anything that uplifts the growth trajectory will be helpful.

We are getting a lot of domestic flows but foreign institutional investors (FIIs) have taken a step back at least in terms of the secondary market, but they are buyers in the IPO and the bond markets. So, there is euphoria in the domestic side. Do you see that also ebbing probably this year?

Roy: The unprecedented retail flows into equity products has helped the broader market and the wealth/ asset management industry within it in an unprecedented manner. While this may come down somewhat from the very high base of 2017, it seems likely that inflows can continue at a very good pace even in 2018.

How do you see mid-caps performing in 2018? Do you expect more IPOs from the mid and small-cap space and 2018 could be the year when a lot of companies from the mid and small-cap space starts?

Roy:An interesting feature of the market in 2017 has been the divergence between performance of large caps and the mid and small caps over the last two years. Nifty50 is still reasonably valued, compared to the broader Nifty500 Index.

While performance of stocks are a function of starting valuation and earnings growth that pans out subsequently, it is likely that at the index level, large cap index will do better going forward. Having said that as the economic engine revives, we would expect quite a few mid and small cap companies to deliver strong earnings growth which should result in strong stock performance from them too.

How are you looking at some of the recent IPOS? Will the fresh issuances continue unabated?

Roy: One of the themes that has played out strongly in the last few years has been the financialisation of savings or migration of household savings from banks and real assets to capital market instruments. Quite a few of the recent IPOs of Life Insurance companies and AMCs are  a play on this theme.

We believe the pipeline of fresh issuances will continue unabated as long as market valuations remain high. This is also helpful as fresh paper is needed too to absorb the huge inflow of liquidity into the market.

Which are the sectors that you are upbeat on and why and which ones are you staying away from? What could be the corporate earnings in the coming year?

Roy:We remain upbeat about a strong recovery in index earnings in CY18. Sectors which can drive that include:

1. Consumption, especially Rural


2. Affordable housing and broader leveraging of households


3. Financialization of savings


4. PSU and Corporate banks as the stressed assets formation slows and starts resolving at the margin


5. Continued recovery in beaten down sectors including Steel and other metals.

Roy:I think Equity linked savings scheme is the best way for retail investors to invest in equities. There are two reasons for these:

• First of course is the tax saving benefit that you get under Section 80 C.


• The second and most important reason is that equity is a long term asset class. Because ELSS schemes have a mandatory three year lock-in, this forces investors to come in with the long term in mind. It is important to note here that in the short term equity is a volatile asset whereas only in the long term, the superior compounding prowess of equities comes to the fore.

Roy:While these are interesting times indeed with a lot of flux, some local and some global. But, the important point is that truly moated companies stand out especially in such times of flux. Even mediocre companies can ride a big wave and look extraordinary when the external conditions are highly favorable, but get truly exposed when the tide goes out!

The history of markets is a tale of the “can’s” and the “can not’s”. The companies/ managements which “can” ride out a turn in the environment are the ones which are moated, paranoid and adaptive. In a fast changing world, the importance of these qualities cannot be over emphasized. I believe that we own a set of adaptive and capable managements in your portfolio. We will continue to monitor them for their performance in a changing environment and focus on selecting true long term winners. Stay invested, only for the long term.

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