We expect markets
to remain volatile over the next 12-18 months, owing to global and local cues. We are in an environment where interest rates in the US are going up; Europe and Japan could see their central banks keeping rates unchanged. Escalating trade war concerns are also likely to keep the global markets edgy.
On the domestic front, rise in crude oil prices, limited fiscal flexibility and events in the run-up to the 2019 elections can affect market sentiment. As regards valuations, we believe the mid- and small-caps remain over-valued, while certain pockets in the large-cap segment are reasonably valued.
So, should one avoid the mid- and small-caps completely?
If investors’ fancy for the mid- and small-cap segments tapers off, then there is room for gain. Even though there has been growth across sectors, including mid- and small-cap segments, at this point it is difficult to find pockets of value here.
What do you think of the government’s FY19 borrowing programme, and its implication on the financial market?
We believe that the government’s FY19 borrowing programme is well-planned. This would effectively reduce the cost of capital. However, any significant interest rate drop from here on is unlikely.
What is your interpretation of the recent monetary policy statement?
We believe markets are prepared for a rise in inflation rate due to the base effect followed by a moderate inflation period. However, we do not see a case for the Reserve Bank to hike rates in the near term. We will have a relook at this scenario in the post-monsoon phase.
Global trade war is a reality now. How should investors treat metal stocks from a one-year horizon?
In the Indian context, we have a very low trade-to-GDP (gross domestic product) correlation in many segments of the economy. If a trade war was to emerge, then India would be an outperformer. The metal sector looks attractive on valuation basis, but past trends suggest that the sector is likely to be volatile.
Are banks a good contra bet from a 12-24-month perspective?
Non-banking finance companies and quality retail banks are not cheap currently. In terms of corporate banks, we believe with a pick-up in private capital expenditure and credit growth, they stand to gain. Public sector banks are cheap on valuation basis, but their near-term outlook seems cloudy. However, from a long-term perspective, the outlook is good as valuations are reasonable.
What are your sector preferences?
Our current overweight sectors include pharmaceuticals, power utility, corporate banks and metals. We are underweight on quality retail banks, consumer staples, and small- and mid-caps. The earnings cycle is getting delayed primarily due to financials. Earnings growth should pick up in the next 12-15 months. It is likely to be driven by financials, pharmaceuticals, technology and sectors connected to capital expenditure.
Over the next one year, should one look at domestic/economy-related themes, or will they be better off investing in export-related stocks?
We believe that investors should look at export-related companies from a short- to medium-term horizon, as they performed badly in the past several quarters. But, from a long-term investment perspective, we would prefer domestic- and economy-related companies.