Divergence between market performance, economy disturbing: Julius Baer CEO

Ashish Gumashta
Despite the growth momentum slowing down, ASHISH GUMASHTA, chief executive officer, Julius Baer, tells Puneet Wadhwa that he remains constructive on the Indian equity markets and recommends investors to gradually build their investment portfolio. Edited excerpts:

The markets have risen since September, led by liquidity and without any improvement in fundamentals. How much of a concern is that for you?

The Indian equity markets have been seeing good momentum over the last couple of months, especially since the time the government cut corporation tax rates in mid-September and the continuing commentary of their intent to do whatever it takes to support growth. This was a sentiment-changer, especially with foreign institutional investors (FIIs) turning buyers since then. Domestic flows (DII) flows remain sticky; the disciplined systematic investment plan (SIP) flow has been steady. 

The market momentum is also aided by a global risk-on rally on the back of easing US-China trade tensions and hyper accommodative monetary policy stance by global central banks. There is clearly a big divergence between equity market performance and the broad economic indicators and this is a bit discomforting, and hence, we don’t expect a big upside in the Nifty50 in the medium term. However, market breadth will improve and other relative value plays will do some bit of catching up.

What are you advising your clients?

Overall, we remain constructive of the Indian equity markets and are recommending investors to gradually build their equity investment portfolio over the next two quarters. Considering the overall divergence in the valuation of ‘high quality growth’ and ‘value’ stocks, we are recommending a ‘barbell strategy’, i.e. have ‘high quality growth’ stocks on one side and beaten-down ‘relative value’ or ‘mean reversion’ plays like corporate banks, pharma and utilities on the other. 

Do you think the mid- and small-cap segments will now play catch-up with their larger peers?

Over the last two years, mid- and small-cap stocks have seen both price as well as valuation correction and are now trading at a decent discount to their large-cap peers. These stocks can rebound in 2020 if the global momentum continues. In this space, we would focus on bottom-up ideas where the company is a leader in its segment or has a niche positioning, there is an operating leverage play, and the stock is trading at a valuation which is close to multiple-year lows/significantly below the long-term average.

Are the markets now more susceptible to a sharp correction than they were six months ago?

There would some correction in the divergence between “high-quality growth” and “value” and would thus expect value to outperform growth/momentum in 2020.

By when do you see growth rates bottoming out?

We are passing through a tough phase of the economic cycle. Over the last few years, consumption growth in the country had been quite healthy, which had been a key support for the economy at a time when investments were completely lacking, especially private-sector investments. However, with income levels probably not rising commensurately, it has led to an increase in leverage at the individual household level front, which now seems to be getting corrected. Unfortunately, the fiscal stress has also restrained the government from making aggressive investments. However, the capacity utilisation levels are gradually trending up and once the demand level starts improving, providing some better growth visibility, it is expected to trigger the next capex cycle (although it could take another 12-18 months and may not be of a similar magnitude as the last cycle). Overall, we are close to the bottoming out of the economic cycle with Q2/Q3 probably marking the base. 

How are foreign investors viewing the recent macro-economic data? What are their key concerns?

Some of the earlier concerns for FIIs (such as the increase in taxes and the government’s presumed apathy to economic growth) seems to have been addressed recently. Overall, India remains an attractive investment destination with its favourable demographics and healthy growth opportunities. Though the growth momentum has slowed down, India would still rank among one of the fastest-growing economies.

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