Earnings will take markets higher, probability of a 35% upside: Bhatnagar

Apart from global cues and corporate results, the markets are eyeing the outcome of the Karnataka Assembly polls to gauge political mood in the run-up to the 2019 general elections, VINEET BHATNAGAR, managing director and chief executive officer, Phillip Capital (India), tells that BJP loss in Karnataka will be a short-term sentiment dampener, from which markets should recover. Edited excerpts:

How prepared are markets for an upset for the BJP (Bharatiya Janata Party) in the Karnataka elections?    

The market knows that winning Karnataka is not going to be easy (for the BJP). The general market understanding for state elections this year is that chances of winning Karnataka will be a close call; a loss in Rajasthan and a victory in Madhya Pradesh (MP) for the ruling party. Karnataka loss will be a short-term sentiment dampener from which the market should recover easily. 

What has been your investment strategy in 2018?

Stock returns over the medium- to long-term are dictated by corporate earnings. Nominal gross domestic product (GDP) growth is another good proxy for long-term equity returns. For India, both factors are showing a robust upward trend. While corporate earnings have surprised negatively in five out of the last six years, the scope for a negative surprise in FY19 is rather slim, as a favourable base and revival in economic activity provide strong tailwinds. Our investment strategy has been to remain focused on corporate earnings and their visibility.
 

We have upgraded the information technology (IT) sector to buy (increased our weight in our model portfolio) and reduced our overweight in metals and mining. We also like non-banking finance companies, consumer discretionary as well as staples and rural-focused plays like tractors. 

Do you see foreign investors cut their India weight further?

Our understanding is that foreign institutional investors (FIIs) are not so much concerned with the prospects of Indian equities, but with equity as an asset class. That’s because bond yields are rising globally. However, based on the structural changes in India, long-term investors are more bullish. It is likely that the allocation towards India will rise over the medium-term. Their key concerns are the management of fiscal deficit with rising crude prices and likely market volatility on account of the general elections scheduled for 2019.

Where do you see the Sensex / Nifty by December 2018-end?

Based on our equity risk premium (ERP) model, our December-18 bear case, base case, and bull case Nifty 50 targets are 9,200, 11,500 and 14,000, respectively. Considering healthy earnings growth, a bear case is less likely to occur. In fact, we believe that earnings visibility will pull the markets higher and that there is a higher probability of the bull-case scenario with almost 35 per cent upside. 

Does any pocket in the mid-and small-cap segments offer value?

Mid-cap valuations remain stretched at more than one standard deviation above the average as compared to the large-caps. 

Your view on metals and banks?

Profitability in the metals sector has returned and there is good earnings visibility, but global factors present a challenge. However, we still have a significant overweight stance in metals and mining space, considering pricing scenario is still in a bull phase and earnings are getting stronger.  
 

We’re cautious on public sector banks (PSBs), as they are struggling with the non-performing asset (NPA) issue with limited immediate resolution in sight. Private banks (with consumer focus) and NBFCs (non-banking finance companies) will continue to fare well. Consumption theme continues to be very strong in the backdrop of a good monsoon forecast and increased rural spending ahead of the general elections.

What are your top buys and sells?

Our top buys are Aarti Industries, Ahluwalia Contracts, Bajaj Electricals, Hero MotoCorp, Shriram Transport, M&M Financial Services, ITC, NCC, HCL Technologies, and Jubilant FoodWorks.