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Impact of election outcome on markets will be transient: Sampath Reddy

Sampath Reddy, CIO, Bajaj Allianz Life Insurance
Markets witnessed their best single-day gain in 10 years on Monday, as exit polls predicted the return of Narendra Modi-led National Democratic Alliance (NDA). This was also the best single-day rally post exit poll outcome since 1999. SAMPATH REDDY, chief investment officer, Bajaj Allianz Life Insurance Company, tells Puneet Wadhwa that an acceleration in corporate earnings growth in FY20 is expected to drive the markets from here on. Edited excerpts:

Has the market's reaction to the exit polls been overdone?

The impact of the election is more transient and the markets will soon digest the same and move on to fundamental factors. It is worth noting that even under coalition governments in the past, the Indian stock markets have managed to fare well. That said, the big development at the global level has been the recent escalation in trade tension between the US and China, and it remains to be seen what impact that has on global growth, global risk appetite and on currencies.

The dovish monetary policy stance of some major global central banks over the past few months has increased global liquidity, which in turn has led to inflows into emerging markets, including India. However, it is unlikely that we will continue to see the same quantum or run rate of foreign inflow. Going forward, foreign flows may moderate and become relatively stable. Domestically, even though equity mutual fund lump-sum flows have slowed down considerably in recent months, we are still seeing SIP (systematic investment plan) gross inflows rising, and that is beneficial -- as it is more-sticky in nature.

How comfortable are you with the overall market valuation at this stage?

Overall, the valuations in both large-cap and mid-cap segments are already pricing in a good earnings recovery in FY20. For the near term, the bulk of the returns should be contributed by earnings growth, rather than PE (price-earnings) expansion. Mid-cap companies have seen a substantial correction in their valuations over the last one-and-half years. Hence, there are select bottom-up investment opportunities in the mid-cap segment. From an allocation perspective, we still prefer large-caps, with some partial allocation to mid-caps now.

How concerned are you with the overall slowdown in global and Indian growth? 

We need to track how the expected global growth slowdown pans out. If the quantum of a global slowdown is severe than expected, then it will have an impact on global risk appetite and India as well.

What has been your investment strategy over the past few months?

With ULIPs (unit-linked insurance plans) being a long-term investment product, we have a longer-term orientation in our investment approach. We are driven by a bottom-up research process, and follow the ‘growth at a reasonable price (GARP)’ investment philosophy. From a cash holdings perspective, we are sitting on moderate cash levels in our equity portfolios. In case of any volatility, we will look to deploy the cash at the opportune time.

Should investors switch from consumption-led sectors to defensive plays from a 12-month perspective?

From a sectoral perspective, even defensive sectors like FMCG are seeing signs of some slowdown. Besides, valuations for the sector remains rich despite the deceleration in profits. The slowdown in the auto sector has been quite clear for a while. 

We like IT services companies due to their good return ratios and valuations. We also believe that the pharma sector is bottoming out. Some of the other sectors on which we are positive/overweight include private banks, which are largely exposed to retail assets. Cyclicals such as capital equipment and cement are also showing signs of recovery. 

What are your earnings growth projections?

The corporate earnings for the March quarter of FY19 have been unexciting so far. However, we are hopeful of a stronger recovery in earnings growth in FY20 and believe that will be a key determinant of the market trajectory.

Nifty 50 index earnings growth for FY19 is likely to be around 8 per cent, and we started the year with double-digit growth expectations, and this has happened for the past few years. For FY20, we expect Nifty index earnings growth to pick up to around 18 per cent. Broadly, the consumption sector has driven growth in the past, and we expect a gradual shift and recovery of growth in the investment-driven themes. 

Besides, some of the earlier underperforming sectors (that have been a drag on corporate earnings over the past few years) like PSU/corporate banks and pharma have largely bottomed out. This acceleration in corporate earnings growth in FY20 is expected to drive the markets now. From a trailing perspective, the valuations currently look elevated, and if corporate earnings do not deliver, then we may see some disappointment in the markets.