Q: As we close to the election result day volatility has touched a multi-year high. Do you see a sell-off or a knee-jerk reaction after elections results assuming Modi coming back?
A: As we see it, the market has partly priced in the return of current administration (rallied almost 10 percent from February 2019 lows), but still, there is room for improvement as election results are a month away.
If one goes by historical trends, markets rally before elections, then there is some amount of profit booking and thereafter post-election results, the market stabilises.
While there has been a certain amount of re-rating in the markets in the last month, we expect markets to take a breather before this uptrend continues.
We retain our target for Sensex at 44,000 by March 2020 (12 percent upside), and any kind of sell-off (around 5 percent or more) should be providing an interesting entry point into equities.
Apart from the noise around elections, the market will take cues from the evolving global market developments and upcoming earnings season.
We have been calling for an earnings recovery and estimate the growth of about 12 percent in FY19 and 20 percent in FY20 for Sensex.
Q: After the recent rally, valuations have gone up for Indian markets. With event risk in the hindsight, where is the pocket of opportunities?
A: After the steep correction seen over the last one year, there is valuation comfort in the small and the mid-cap space. We find value there. As broad-based profit growth was sparse, ‘growth/quality at any price’ had worked very well for the last few years.
Given the run-up in the largecap stocks, they are now trading at the higher band of valuations. To that extent returns expectations from this segment of the market must be rationalized.
Cost-effective ways of investing in the largecaps via ETFs should be considered. We would continue to remain selective in a stock selection where earnings growth is clearly visible.
Most mutual funds seemed to be sitting on cash during the last two months and our sense is that they would be keen to allocate more towards the mid and the smallcap counters.
In fact, our interaction with fund managers indicates that most of them are now aggressively positioning their large and mid category funds to investors.
Q: What is pushing the markets higher?
A: We saw a significant foreign selling last year to the tune of $5-6 billion and from a very low base. They have begun to come back in CY19.
From a year-to-date (YTD) perspective, FPIs have added $8 billion of net equity flows into India, while most of the DIIs have stayed out of this rally.
In our opinion, FPIs are taking a long-term view on the Indian economy – structurally over the next five years India is expected to remain amongst the fastest growing world economies.
Most of the forecasts pegging India’s GDP growth closer to 7.5 percent, a burgeoning middle class with better spending capabilities, expected dovishness by the US Federal Reserve (providing comfortable liquidity) and green shoots seen in the capex cycle augur well for the equity markets over a 2-3 year time period.
While your point on crude needs to be further watched, we think there are global oil spare capacity and higher inventory levels which could offset any disruption in oil supply due to Iranian sanctions, etc.
Q) What are mistakes that one should avoid especially when benchmark indices are trading near record highs?
A: One needs to never forget that asset allocation remains the cornerstone of any healthy investment portfolio.
Trying not to chase returns or to get exceedingly risk averse is the key to ensuring that the investments made eventually help meet the financial goals they were set to achieve at the onset.
A regular review of the portfolio, weeding out laggards and even taking profits out from investment that has run ahead or delivered their expected returns much sooner, should help an investor stay in good stead.
Q: I read somewhere that ‘3Es’ – election, economy, and earnings – will decide the direction for markets in the near term. I would like to add rupee and crude as well to the list. What are your views?
A: Brent crude is up 47 percent YTD to $75 per barrel on the back of US sanctions on Iranian oil exports. Such sanctions bite, because the US can make life difficult for countries failing to comply, given the extent to which America controls flows of dollars around the world.
Iranian exports have halved to between one million to two million barrels a day going to China, India, South Korea, Japan, and Turkey.
Waivers allowing these exports were expected to be rolled over, which is why the market was surprised by the White House’s newly stated resolve to “bring Iran’s oil exports to zero”.
We believe the key OPEC nations who have been cutting down their oil production would gradually ramp it up to fill up the hole left by Iranian sanctions. This should help limit the upside to oil prices over the course of the year.
As for the Indian rupee, the Reserve Bank of India (RBI) has signaled that it intends to keep liquidity at the neutral zone and would use both the bond and foreign exchange (FX) markets to augment rupee liquidity.
However, with rupee seeing strength on a REER basis, RBI can use FX route more than bonds, unless the bond curve steepens too far. The outlook for FY20 is far more favourable, given a relatively benign outlook for commodity prices, fading headwinds from the liquidity crunch and relatively stable portfolio inflows.
While the rupee could remain in the 68-71 range against the US dollar, mild depreciation over the medium term can’t be ruled out given global growth uncertainty, volatile capital flows, revival in commodity prices, etc.
Q: What has been your portfolio strategy?
A: As broad-based profit growth was sparse, ‘quality at any price’ had worked very well for the last few years. With a positive change in margin growth likely to become more dispersed, the trend is undergoing a change providing buying opportunities.
We would continue to select stocks where earnings growth is clearly visible. Over the last few months, we had called for advancing equity allocation prior to elections.
For those who missed allocating to equities, any market consolidation should be used to fill the allocation gap. After the steep correction seen over the last one year, there is valuation comfort in the small and midcaps. We find value there.
Given the run-up in large-cap stocks, they are trading at the higher band of valuations. To that extent returns expectations from this segment of the market must be rationalized. Also, cost-effective ways of investing in large caps via ETFs should be considered.
Q: Do you think FII momentum will continue if we see Modi coming back?
A: FIIs have added over $8 billion YTD, coming out of an unfavourable year. We believe the FIIs are betting on the long-term India growth story.
While we are not experts to predict elections, if there is a return of the current government, it would only act as a catalyst in front-loading some of these flows. Currently, most of the FII flows into India have been a part of the emerging market (EM) focused funds and not necessarily in India focused ETFs alone.
A stable administration at the Centre could see India focused ETFs also attract flows. Given our views on other macro factors that we discussed, we see FII flows sustaining in Indian equities.
Q: Global markets are also trading near highs. Does it make sense to invest in funds that have global exposure to diversify the portfolio?
A: Breaking the home bias should help the investor of today to build a portfolio that offers truly a better risk-adjusted portfolio.
Most of us would have seen the “heat map” on Indian asset classes that clearly corroborate the fact that 'winners rotate'. If we zoom out a bit and compare Indian markets to its global counterparts, the narrative doesn’t change much.
Different asset classes, different economies perform at different points in time. Global markets offer exciting thematic options to choose from (agri focused, global commodities-focused, energy, gold, mining, country-specific, EM focused, etc).
Indian investor generally doesn’t get the exposure to such a diverse range of themes in the domestic market. From this point of view too, within global allocation, investors can look to optimise the risk – returns profile of their portfolio. These themes could be short-lived and could involve active management.
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