Broader index earnings growth to be in high single-digits: SBI Life CIO

Sectors such as automobiles, staples, banks with retail portfolio and the metal sectors may show double-digit growth

Gopikrishna Shenoy, chief investment officer, SBI Life, expects 15%-plus earnings growth for Nifty companies for the next two financial years. In an interview with Ashley Coutinho, he says the trajectory of interest rates is likely to be upward and volatility in the bond market may likely continue for some more time. Edited excerpts:

What is your outlook for the market for the year ahead?
 
On an average, we are pencilling in 15 per cent-plus earnings growth on Nifty companies for the next two financial years and see strong global growth of 3.3 per cent. The markets may not better the returns of the previous calendar year. However, we are sure investors would evaluate equities as a long-term asset class and would take advantage of the falls. The fact that inflows to the fund industry were good in February when markets corrected by 4.8 per cent strengthens this belief.

 

What is your view on mid- and small-caps as investment bets?
 
For a large $2 trillion economy like ours mid- and small-cap companies will continue to grow at a faster rate than the large-caps. We are forecasting earnings growth of 25 per cent-plus for the Nifty mid-cap index and 30 per cent plus for Nifty small-cap index. This is far higher than the 15 per cent average growth for Nifty companies that we talked about. We would pursue our policy of investing in quality mid-cap companies that have unique business models and a differentiated product portfolio. While many stocks are still richly valued, there are beaten down stocks one can look at.

 
What are the global cues to watch out for?
 
Strong global growth at 3.3 per cent this year has kept pace as predicted. Apart from growth, increasing trade protectionism and potential retaliatory measures by other countries, oil output by non-Opec (Organization of the Petroleum Exporting Countries) countries, the pace of the (US) Fed rate hikes and other commodity prices are other factors to watch out for. The rally in global markets sees no signs of abating, and the S&P 500 is up 4 per cent in the first three months of this calendar year.
 
What are your expectations from the upcoming earnings season?

 
Broader index earnings growth is likely to be in high single-digits. Sectors such as automobiles, staples, banks with retail portfolio and the metals sector may show double-digit growth.
 
Which sectors are you betting on?
 
We like capital goods & engineering given the government thrust and likely pick-up in execution. We are also positive on consumer discretionary on the back of good volume growth and steady margins. The IT sector is emerging and we await more data points on demand visibility. Credit costs are likely to impact profitability of banking companies that have corporate exposure in the coming quarters.

 
The bond market has seen a lot of action recently as the government’s fiscal math hasn’t played out as expected. Will this volatility to continue?
 
Bond markets had a dream run for the past five years, with bond yields softening by 1.5 per cent during this period. Internationally and domestically, the interest rates have bottomed out. The world is undergoing an adjustment wherein an era of large liquidity coupled with low interest rate is set to go away. This is a welcome change and indicates economic strength. Volatility is likely to continue in these uncertain times, which is good for long-term investors.

 
On the fiscal side, the government is determined on fiscal consolidation. However, revenues are hard to predict till GST stabilises. We are certain this will eventually happen. A large part of the shortfall would be filled, we think, when the e-way Bill is implemented. The concern is on the demand side, especially with respect to PSU banks that make up about one-third of sovereign bond demand. Inflation is likely to move up but has surprised participants on the lower side. Upside on account of MSP and the Seventh Pay Commission as of now is offset by lower-than-predicted food and vegetable prices. Should the monsoon be kind on us, we are in for a surprise in the second half of FY19.

 
What is the trajectory of interest rates going forward?
 
The trajectory is likely to be upward. Inflation, though volatile, on an average will be higher than last year. The global macro backdrop will be of rising interest rates and reduction in balance sheets of major central banks. The average spread of 10-year government paper over the repo is 40-60 basis points (bps); currently it is at 160 bps. In a way, the market is now pricing in rate hikes.