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'Markets may be range-bound in FY19, prefer rural consumption, private banks'

Corporate earnings growth is recovering, and after the election overhang dissipates, the markets should deliver handsome returns.

April 25, 2018 / 03:17 PM IST

Over the last few years, equity markets across the globe, including India, have done quite well and have surged to all-time high levels. Investors have had more reasons than one to rejoice and they did not have to grovel for every penny they made.

However, with multiple state assembly elections lined up for 2018 and the general elections slated to take place in 2019, Indian equity markets are likely to remain range-bound this year, Anurag Jain, Chief Investment Officer, Canara HSBC Oriental Bank of Commerce Life Insurance, told Moneycontrol in an interview.

Edited excerpts:

Q. Do you expect Indian equity market rally to continue in FY18-19?

A. In the last couple of years, the rally was especially sharp in mid-cap and small-cap companies and was supported by all-time high inflows in equity mutual funds. Going forward, we are now witnessing a growth revival globally and analyst's expectations of corporate earnings are being revised upwards.

This growth revival coupled with higher crude and commodity prices have also led to rising inflation and interest rates. In addition to that, a heavy domestic election calendar and general elections in 2019 make us believe that Indian equity markets should remain range-bound this year and provide good opportunities to buy good quality stocks and build portfolio for the medium to long term.

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Our view is that the underlying economic growth momentum is strong and corporate earnings growth is recovering, and after the election overhang dissipates, the markets should deliver good returns. In the interim, sectors and stocks delivering better than expected growth would continue to outperform and deliver returns for the investors.

Q. Rupee has weakened to nearly a 7-month low against the US dollar. What range is it expected to settle in and how is it going to impact equity and debt markets?

A. The rupee has depreciated by around 5 percent from the top in the near term and has been surprisingly resilient compared to other emerging market currencies.

Looking at the trade flows, crude oil price, foreign flows, rising global interest rates and lower tax rates in the US, we believe that Rupee maybe modestly over-valued. The currency should adjust to the unfolding macro-economic conditions to maintain export competitiveness and pass on price signals for imports, and balance the economy.

India is a net importer and hence, any depreciation of currency adversely impacts the economy leading to impact on both equity and bond markets. However, movements in equity and debt markets would be cushioned as a part of the correction would happen through the currency market. In our view crude oil remains the single biggest factor to be monitored for the Indian economy and markets.

Q. Given that the MET has predicted a normal monsoon this year, what’s your outlook for stocks with a rural theme?

A. A good monsoon in FY19 would be third consecutive year of good rains for the country. Good monsoon, coupled with government focus on the rural economy in terms of building rural infrastructure, providing better agricultural support prices, focus on increasing farm incomes and creating job opportunities, bodes well for rural India.

Signs of the same are also visible in terms of tractor sales, two wheeler sales and consumer durables doing well, and they are expected to continue doing well in the foreseeable future. Thus, we remain quite optimistic on themes like consumption, consumer durables and premiumisation benefits arising out of strong rural economy.

Q. Factoring in concerns surrounding the banking sector with ongoing concerns? Should investors accumulate banking stocks at current valuations?

A. Our investment philosophy has helped us to be positioned in better stocks with lesser concerns in this space. Developments in overall banking sector with regards to asset quality and conflicts of interest are unfortunate indeed. Yet every dark cloud has a silver lining.

The silver lining here is that this will lead to a clean up of the banking system, better governance and fundamental reform going forward. A strong and healthy banking system is absolutely essential for the economy to grow at a fast clip. As investors we are very selective and conscious while picking out of favour BFSI stocks.

Apart from valuations, overall quality, liability franchise, digital preparedness and return to economic profitability are key considerations. However, we continue to remain positive on private sector retail financiers and very few select NBFCs with strong asset franchise.

Q. Are you comfortable with the current valuations of large-cap and mid-cap stocks?

A. Economic activity is improving across the board and is driving corporate earning acceleration. We believe that this growth momentum should sustain and 12 months from now, one year forward valuations of large cap indices would be at their long term average.

Valuations of the mid/small cap segment of the market, however, would be slightly higher. Thus, more than 5-7 percent correction in the market would make valuations attractive and this in our view would provide downside support.

Also, in the market there are always pockets of opportunities available to invest in and deliver returns for investors. We are very selective and quality conscious in the market and while valuations are an important consideration, on an overall basis we prefer high quality, fast growing, agile companies with good management and corporate governance practices.

Q. In the last one year, which sectors have you trimmed your holdings in and become underweight on? Why?

A. Being a growth investor, we focus on sectors that provide good growth opportunities, lower capital intensity and high scalability of businesses and avoid sectors which have matured and where growth is slowing down.

In line with this philosophy we remain cautious on the pharmaceuticals, telecom, infrastructure and power utilities sectors. We believe that the quality and sustainability of earnings growth here would be much worse than benchmark and other available alternatives. This approach has kept us on a sound footing.

Q. What is your outlook on the bond market and how do you think an investor should invest in them?

A. After the euphoric start to the new financial year FY19, the bond market seems clearly worried about the uptick in crude prices, future inflation uptick because of possible MSP hikes in kharif crops, uncertainty around expectations of GST collection and the overall impact on the government's fiscal deficit.

We see the global growth pickup along, and higher inflation print, keeping global yields higher as well. All the above concerns have led to yield curve steepening. Since the yield curve is already pricing in rate hikes ahead, we believe there is strong case for conservative long term investors to take advantage of the steep yield curve by investing in funds that have a lower duration and well-diversified exposure to sovereign and corporate bonds as value seems to have started emerging in those pockets.

@thanawala_hiral
Hiral Thanawala
first published: Apr 25, 2018 01:48 pm

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