Investors should shift from overvalued stocks (quality names) and sectors (like consumer) to cyclical and quality mid-small caps, Vinod Nair, Head of Research at Geojit Financial Services, says in an interview to Moneycontrol’s Kshitij Anand.
Edited excerpts:
Q) The RBI kept rates unchanged in its December meeting. Do you think it is the right move, considering that the GDP growth dropped to over a six-year low in the September quarter?
A) It is a well-thought unanimous decision of the RBI to give ample time for the transmission of five consecutive rate cuts undertaken since January 2019 and get better clarity on the inflation trajectory.
With the slowdown in India getting more severe than expected and RBI cutting real GDP forecast to 5 percent from 6.1 percent for FY20, we can expect more rate cuts, depending on the evolving macro-economic data in the upcoming MPC meetings.
We don’t expect this decision to completely change the trend of the market, but there could be some consolidation in rate-sensitive stocks in the short term.
Q) What should be the investment strategy at a time when the market is trading at record highs?
A) Every cycle is unique, though a standard approach is advisable but may not provide an upper-hand in all the cases.
This time, we suggest investors shift from overvalued stocks (quality names) and sectors (like consumer) to cyclical and quality mid-small caps, though we are at the top of the Nifty50 and the Sensex.
Q) Auto sales continue to remain muted for November as well but some experts feel that a recovery is underway. Do you agree?
A) Auto numbers for November were largely in-line with our expectation and we anticipate recovery to start by January owing to a lower base.
We believe that the sluggishness in the auto sector and the economy is likely to reverse with the government's intervention and supportive policies taken in the last three months.
However, structural changes in technology and consumer preferences will remain as a headwind in the near term. We expect the scrappage policy to be introduced in the future, providing further respite for CVs.
The current inventory level will reduce in H2FY20 by pre-buying before the launch of the BS-VI model from April FY21. The auto sector will underperform in the medium term, as valuation continues to be at a premium.
Q) Mid & small-caps have seen some recovery in the last few months. Do you think smart money has started moving in some of the beaten-down names in the broader markets space?
A) Yes, we are experiencing an increase in the holding of mutual funds and other financial institutions in the last one-two quarters, which is very positive.
We feel that mid and small caps will outperform the market in the next two-three years as economy and risk-taking ability improves.
Q) How is the December quarter likely to pan out? Do you see more pain for India Inc?
A) The third quarter is likely to be better on a year-on-year basis, led by a tax benefit and good performance from the finance sector. It may not be as good on a quarter-on-quarter basis since the economy is still at the bottom. Real growth in earnings can be expected by the second half of FY21 as credit and capex improve.
Q) Data suggests that bulls remained in control in December in seven of the last 11 years. Will 2019 be different because we are trading near record highs and some consolidation is possible?
A) The market is expected to maintain its buoyancy since the environment for equities has improved. Globally, ease in the trade war, Brexit, reduction in geopolitical risk and accommodative monetary policy will support the world equity market.
Domestically, interest cost is falling, tax is reducing and incentives are propping up and it is a good time to invest in equities.
Q) Do you think the telecom sector has bottomed out and investors with a long-term horizon should adopt buy on dips approach?
A) The feasibility of the sector has improved post the moratorium on spectrum cost and huge hike in tariff. Still, we have to be stock specific in which we have a positive view on Reliance Industries due to solid outperformance of Jio in the telecom sector.
Q) Which are the sectors that are likely to outperform or generate alpha as the economy turn arounds and why?
A) The finance sector is likely to outperform due to NPA resolution and reduction in the interest cost. Cyclicals like metals and industrial will do better due to improvement in global and domestic economy.
Quality mid and small-caps likely to do well due to better discovery in valuation as well as export-oriented companies like chemicals and aquaculture. And, rural-focused sectors like agriculture and fertilizers will do well. Infrastructure will be volatile with a positive outlook.
Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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