Indian equity markets could exhibit higher volatility in FY19, compared to the last three years, believes Sanjay Dongre, Executive Vice President and senior fund manager at Mutual Fund.
In a freewheeling chat with Moneycontrol, Dongre said, on the one hand, the macroeconomic environment of India is deteriorating, while on the other earnings growth that was lacking in the market is picking up. This could result in higher volatility in FY19 compared to the last 3 years.
Sectors like auto, cement, construction, engineering, financial sectors will see a double-digit earnings growth. The normalisation of earnings may also happen in PSU banks and corporate-oriented private sector banks.
He expects Nifty earnings growth to be in the range of 18-20 percent in FY19 and 14-15 percent in FY20.
Dongre said the fund house usually does not take cash calls is holding around 3-4 percent cash in its schemes.
Excerpts of the interview:
Q. The year FY19 started on a strong note, but there have been fears of a trade war resurfacing. Do you see a volatile FY19 after a stable FY18?
A. Whatever we have witnessed in terms of announcements from US or China are mostly rhetoric, they are not yet implemented on the ground. These countries are aware of the consequences of getting into the trade war and therefore, we could see them coming to the negotiation table and finding an amicable solution which is not harmful to each other. Trade war-related thing should die down going forward.
When we look at the macroeconomic environment in our country it is undergoing a change. Inflation and interest rates have bottomed out. Today they are 100 bps higher than what they were prevailing a year back. Current account deficit is almost 1.6 percent. The benign environment that we have been seeing in the last 3 years is not going to remain benign anymore. Therefore, news flow on the various economic indicators may impart volatility in the market.
On the other hand, the probability of earnings being in double digit is going to be higher after 3 years of subdued earnings growth. We expect normalisation of earnings in some sectors like banking. So on the one hand, you have the macroeconomic environment which is deteriorating, on the other, earnings growth that was lacking in the market is picking up. So, we have a balanced picture and because of this volatility is likely to be higher in FY19 compared to what we have seen in the last 3 years.
Q. What are your expectations on corporate earnings? How much of earnings growth can we expect in FY19?
A. Nifty earnings growth should be in the range of 18-20 percent in FY19 and 14-15 percent in FY20. Part of the earnings growth can be attributed to the base effect of the past year.
Q. Which sectors would lead the earnings growth?
A. Most of the growth is expected to come from the domestic-oriented sectors. As per RBI expectations, GDP may grow 7.3 percent in FY19. Unlike the past few years, the contribution of the manufacturing sector is expected to be higher.
Sectors like auto, cement, construction, engineering, financial sectors will see double-digit earnings growth. The normalization of earnings may also happen in PSU Banks and corporate oriented private sector banks.
Q. Are you comfortable with the current valuations in the market?
A. So when we look at the market from the valuation perspective it is quoting at 16.7 times one year forward earnings. The average market multiple of last 10 years is about 16-16.5 times. Currently. markets are trading at above the average levels. So to that extent valuations are not cheap. Therefore our expectations of return from the market should be on the lower side. We may not be able to see a repeat of high returns that we have seen experienced in the last 3 years.
Q. So what will be your strategy in your schemes?
A. As a fund house, we do not take cash calls. I am betting on the companies that are expected to deliver earnings growth higher than the market earnings growth. At least that will give us some downside protection.
Q. What sectors is UTI MF upbeat on?
A. We are looking at companies that are high on expected earnings growth. Domestic-oriented sectors like auto, cement, construction, engineering, and financials may fit the bill.
Q. What is your view on defensive sectors?
A. If you look at FMCG sector, the earnings are expected to be in line with the market earnings growth. If you look at valuations then they are trading at all-time high valuations. During volatile times they can act as a defensive. The earnings growth will be in lower single digit in the other two defensive sectors IT and pharma.
Q. How investors should playout banks?
A. In the last 20 years, private sector banks are able to withstand the volatility in interest rate cycle and asset quality cycle compared to PSU banks. For the last 18-24 months, Corporate oriented private sector banks are experiencing stress in its loan books. However, these banks are more towards the end of the stress recognition cycle rather than toward start or midpoint of stress recognition cycle. Going forward the credit cost of these banks may decline substantially. Hence the profitability of these banks may come to normalcy in next 12 months period. One can expect the corporate-oriented private sector banks to quote at a better price to book multiple.
Q) Mid and Small-caps which hogged the limelight in FY18, do you think the trend will continue in the next financial year? If yes, why?
A. Nifty is quoting at 16.8 times one year forward multiple. Despite the correction in the last 3 months, mid /small caps are quoting at premium valuations compared to large caps. The real serious money is made when these small and mid-cap stocks start quoting at a discount to the large caps.
Q. What are the current cash levels in your fund?A.
We generally don’t take cash calls. It would be around 3- 4 percent.