Growth facing structural, cyclical issues: SBI Mutual Fund's Navneet Munot

Cyclically, global growth and challenges in the NBFC sector are at play, says Navneet Munot

Equities look attractive from a forward returns’ perspective, given the sharp correction in valuations, says Navneet Munot, executive director and chief investment officer, SBI Mutual Fund. In an interview with Ashley Coutinho, he says the government should focus on job and income creation to catalyse consumption growth. Edited excerpts:

How have the latest measures announced by the government impacted sentiment? 

With the surcharge hike for FPIs done away with, sentiment is bound to improve. Trying to give a growth push while adhering to fiscal consolidation is a step in the right direction. We expect more relief measures for real estate and infrastructure firms, in the coming weeks. As of now, equities look attractive from a forward returns’ perspective. This is because valuations have seen sharp corrections and sentiment, as measured by our proprietary indicator, has moved to a pessimistic extreme. Risk to our call emanates from global narratives on EM equities. 

What’s the outlook for economic growth?

Growth is being impacted by both structural and cyclical factors. Structurally, weakness in household jobs and income prospects, and lack of competitive advantage in a host of export sectors are affecting growth. Cyclically, global growth and challenges in the NBFC sector are at play. While current narratives on India’s growth look grim, there are positives.

Monetary easing since the beginning of the year should start to fructify in terms of reduced cost of borrowing and better lending growth in H2FY20.

Indian businesses have seen capacity utilisation improve and are balance-sheet ready to undertake capital formation. The Centre must act swiftly to iron out bottlenecks in policy actions taken in the last term.

Do you see meaningful recovery in corporate earnings?

We expect earnings growth to improve over its average growth of 5 per cent in the last five years, but it is unlikely to meet Street expectations. Our top-down earnings growth forecast for FY20 is around 20 per cent, led primarily by financials.

Excluding financials, earnings growth is likely to remain muted.

Which sectors do you bet on?

We are overweight on private banks with retail liability franchise, as they have a strong liability profile with an opportunity to gain market share from PSU banks.

We are also overweight on industrials over consumer stocks. While valuations are expensive in both these sectors, industrials seem to be at the bottom of the recovery cycle. We are bearish and underweight on IT.

How would you play the banks and NBFC space?

We continue to like private banks with strong liability franchise and select PSBs where we have comfort on capital and asset quality. That said, the spread of sectors contributing to the recent slippage for the banking system is quite broad-based, indicating a broader slowdown in economic activity. While lower rates would help, the demand environment has to improve for capital expenditure to pick up materially. Among NBFCs, our preference continues to be for well-run firms that have demonstrated strong performance over the long term.

FPIs pulled out money out of India last year, while MFs purchased stocks. How do you see this trend panning out?

Over the long-term, flows will be dictated by a complex interplay of factors, including relative growth. MF investments into equities is backed by strong retail flows. However, these flows have moderated somewhat in the past few months. 

Retail flows are led by returns and the current market performance doesn’t provide a strong support to flows.