For the last one year, both mid-cap and small-cap stocks have outpaced the Sensex. According to Amerjeet Maurya, Senior Equity Research Analyst - Mid Caps at Angel Broking, this takes care of concerns over their valuations and fundamentals.
In an exclusive interview with Moneycontrol’s Kshitij Anand, Maurya spoke about his take on the market, the rising fears of a trade war between China and the United States, and much more. Excerpts...
FY18 started on a strong note with Nifty reclaiming 10,300 in the first week of April. Is the rest of FY19 likely to belong to the bulls as well?
It will be hard to classify FY19 as a year of the bulls or bears. Valuations in India are already rich and any fundamental upside has to be driven by growth in earnings.
Global cues like US Fed rate hike, progress of Brexit, potential trade wars and Middle East tensions will prove to be sentimental overhangs for the market.
Because of the above combination of events, we advice investors to take a cautious approach and invest in selective blue chip companies backed by fundamentals.
Do you think Nifty or Sensex will surpass their record highs this year?
When we refer to a Nifty level of 12,000, we are looking at potential gains of over 20 percent from current levels. That is the kind of returns that Indian markets witnessed in the last 2 years.
Repeating that performance for a third time may be a tad difficult, especially considering the global economic and geopolitical uncertainties. The big challenge in FY19 will be to decisively scale the previous high of 11,161 on the Nifty and 36,443 on the Sensex.
How do you think fears of a trade war will play out for Indian markets in FY19? Which sectors are likely to see the worst of it?
We expect and hope that the collective wisdom of world leaders will not allow trade wars to escalate. In the event of a trade war actually materializing, industrial metals, oil, capital goods and banking could be hit.
However, we do believe that the consumption story which is built around domestic demand should be largely immune to these global factors and should continue to thrive under most conditions.
Which sectors do you think are most likely to hog the limelight this year?
We are expecting IT and consumption sectors to perform better in the upcoming financial year, as valuation of IT sector is comparatively low.
Apart from attractive valuations, solid fundamentals of technology innovation and healthy earnings growth are fuelling the rally in technology stocks this year. Consumption sector is also performing well both on the top-line and bottom-line front.
Do you see Modi 2.0 happening?
The BJP has in the past few years mastered the art of empire, working hard to grow with every election. Today, the states they are in power cover 70 percent of India’s population.
With every election, they are coming in power in states where they haven’t won before. BJP government implemented various reforms like GST, Jan-Dhan account, IBFC and recapitalization of PSU banks which will benefit the economy going ahead.
Mid-caps and small-caps were the highlights of FY18. Do you think that will continue?
Since the last one year, both mid-cap and small-cap stocks have outpaced the benchmark Sensex, beating concerns over valuations and fundamentals.
Going ahead, we believe the quality of midcap and small cap stocks would outperform the index mainly due to strong earnings momentum, better ROE and relative releasable valuation.
What should the portfolio of a 35-40-year-old investor ideally contain this year?
Portfolio is designed to suit investor requirement considering his risk and return or you can say that it is a combination of securities such as stocks and bonds. Suppose if an investor is really for long term then it will be advisable to invest 60 percent in equity and 40 percent in debt, i.e. bonds, and vice-versa for an investor if he is in for the short term.
Do you think earnings will come back to double digits in FY19?
Since the last two years, earnings have remained flat mainly due to the implementation of GST and demonetization. However, we expect Sensex will able to report healthy earnings growth on account of recovery in credit growth cycle, healthy global demand, lower inflation, comfortable interest rates and recapitalisation of banks.
So considering all these factors, it is expected that earnings will be in double digits in FY19.
An analyst recently said India is now part of the Expensive 4 in terms of valuations. Do you agree with that statement?
Yes on the valuation front, India has been in the four most overvalued markets due to the lower earnings growth in the last two-to-three years.
Do you see FIIs flows coming down in light of constant rate hikes by the US Federal Reserve and rising US bond yields?
Continuous rate hikes by the US Fed don't affect FII flows much. As seen in the past, there is continuous cash inflow from FIIs when US Fed hikes interest rates repeatedly.
How should investors play PSU banks in FY19, given we are seeing new frauds emerging from different banks on a regular basis?
Considering recent events like the PNB fraud, subdued credit growth and increasing bad loans in PSU banks, an investor should use a wait and watch approach for these stocks.
However, NCLT process can impact positively; a few cases (Binani Cement and Bhushan steel) have received good interest from bidders. Early resolution of NCLT cases, along with recapitalisation, would be positive for them.