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Road ahead for equity markets will be challenging, says Shyamsunder Bhat

Shyamsunder Bhat, CIO, Exide Life Insurance
With Wuhan-based coronavirus spreading fast outside mainland China, risks to global economies could become more pronounced in the next quarter at a time when the global growth is slowing. While the potentially slower global growth is being reflected in our debt market with yields trending lower, it has not yet been reflected in our equity market until earlier this week, SHYAMSUNDER BHAT, chief investment officer of Exide Life Insurance, tells Nikita Vashisht. Edited excerpts:

The coronavirus outbreak is continuing to spook sentiment. Despite steps taken by China, the growth forecast for India and the rest of the world have been cut. How do you see the development playing for the markets?

The Coronavirus outbreak would impact the growth not only in China but many other large economies which have trade linkages with it. This is particularly in light of the fact that China’s linkages to global GDP has increased substantially over the past decade. While the impact on China’s growth is immediate, it would be felt on the other countries in the next quarter as the inventory- stocking by its customers prior to the Chinese New Year could see them through the present quarter.

While the potentially slower global growth is being reflected in our debt market with yields trending lower, it has not yet been reflected in our equity market until earlier this week. This market resilience could possibly be due to an expectation of a further liquidity stimulus in some of the economies to counter this additional slowdown, a part of which could find its way into the equity market.

What's the road ahead for the markets for the next year? What factors/events should investors be wary of? Will 2020 be the year of mid-and small-caps?

Large-caps (and more recently in some of the mid-caps and small-caps as well) have been rallying since September 2019. With the Nifty50 only marginally below its lifetime high, the road ahead for the equity market in 2020 appears to be a challenging one. For a sustained up move from the present levels, we would need to see a pick-up in industrial and consumer demand, and growth in corporate earnings. While there could be some recovery in rural demand post an expected bumper Rabi harvest, a recovery in urban demand is uncertain. Private sector capital expenditure (capex) is minimal, and government capex could face headwinds in the latter part of 2020, particularly if the revenues fall short. This could lead to a cut in spending as it would not be possible to have a fiscal deficit of more than 3.5 per cent in FY21.

The government plans to list LIC in the coming months. Besides, SBI Cards will soon bring its IPO. Given this, how do you look at the prospects of the primary market this year?

Some of the quality issuances in the primary market have fared very well post their listing. Considering the legislative changes and other requirements for insurers at the time of going public, it would be challenging for LIC’s IPO to be completed within a year. That said, the size of this issuance, as and when it happens, would be large enough to impact the secondary market negatively around the time of the IPO.

Is the worst yet to playout for the telecom sector in terms of growth? What’s your view on this sector from a six – 12 month perspective?

 
While the telecom sector in itself could continue to grow, the uncertainty is in the market structure in terms of the number of players. For the government itself, it must be a dilemma to simultaneously follow the Supreme Court’s orders and collect the dues from the telecom companies, even as it has to ensure that the present large companies in the sector remain viable. Given this, the solution would need to be a sustainable one and not just a short-term one. The stronger players in the sector would continue to do well over the next year.

How do you view the developments from the banks’ standpoint? Are they in for a fresh round of stressed assets coming from the telecom and realty sectors?

 
For banks, the picture would become clearer with the developments over the next month, depending upon the solution that is arrived at by the government. The risk of incremental stressed assets from the telecom and realty sectors, beyond those which have already been recognised over the past few years, does exist for some of the banks.

Your view on corporate earnings growth in the financial year 2020-21 (FY21)? Overweight and underweight sectors in this backdrop?

 
While the analyst estimates continue to be in a range of 20-25 per cent earnings growth for the Nifty50 in FY21, we could see these estimates being lowered during the course of the year, as the gains from the cut in corporate taxation would already be in the base year (FY20) for some of the corporates. Profit growth is expected to be strong for the banking, oil & gas, pharma and cement sectors. Telecom, automobile and metals sectors could also post a good growth, but we should have better clarity on these after the first couple of quarters of the year, for different reasons specific to each of these sectors.

What has been your investment strategy over the past year? How much cash are you sitting on in your portfolio? What's the road ahead for domestic flows into the equity segment over the next year?

 
Our investment strategy over the past year has been to focus on large-cap companies with higher visibility in terms of growth, and having a 15-20 per cent allocation to select mid-cap companies with an emphasis on the quality of the management and balance sheets. Our cash level was slightly higher, at around 8-9 per cent of the Fund as of January.

While domestic mutual funds have seen lower inflows in equity funds in 2019 as compared to the prior two years, we saw a change in trend in inflows from foreign funds. FIIs were large buyers in 2019 -- higher than in the past 4 years -- and have continued to be buyers in the first two months of this calendar year. That said, FII flows towards India would depend upon whether the liquidity flows towards emerging market equities continue to remain strong. 

Over the next year, domestic flows would largely depend upon whether we see an improvement in domestic growth and sentiment.

From a year's perspective, how do you suggest investors fine-tune their portfolio? Is it a good time to look at the debt / fixed income segment?

 
Debt funds, which did not have exposures to the sectors and corporates and have witnessed downgrades or defaults in the past 1-2 years, have shown very high returns over the past 2 years due to the rise in bond prices with falling yields. Even on a 5-year basis, many of the debt funds would have fared better than equity funds, as even the Nifty50 index has managed to give only a 6 per cent return. Over periods longer than this, equity assets have generally delivered returns better than debt assets. While asset-allocation would vary with the age and risk-appetite of individual investors, it is suggested that investors have a balanced mix of equity and debt investment options in their portfolios, and have a longer-term perspective of 7-10 years or more.


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