Large-caps expensive compared to long-term averages, says Mihir Vora

'We are positive on private-sector banks, both retail and corporate', said Mihir Vora, director & chief investment officer, Max Life Insurance

While liquidity has been countering the slowdown so far, growth needs to catch up, says Mihir Vora, director & chief investment officer, Max Life Insurance. In an interview with Business Standard, he says relative valuations of mid-caps versus large-caps are looking comfortable even though earnings growth remains evasive. Edited excerpts: 

What is your market outlook for 2020? 

The markets are likely to be driven by three factors. First, the global liquidity tap has been switched on in the past quarter as the US Fed has begun asset purchases. The foreign flows that we saw in the past few months are a result of this “risk-on trade”. It is important for India that this tailwind continues. The Reserve Bank of India is pushing for lower lending rates and regular domestic fund inflows into equity markets have sustained even in volatile times. 

The second is the revival of domestic consumption growth. Activity is still slow but the rate of decline is reducing and a low base has been created. It is crucial that these do not slow down further. The third is the pick-up in private-sector investment. The ease-of-doing-business, business confidence and “Make-In-India” are the most critical factors for India to get back to 7 per cent growth and the onus is largely on the government. 

What is your take on current valuations? 

Valuations of large-caps are expensive compared to the long-term averages, but this is also the situation in other markets. The ‘new normal’ of near-zero interest rates in the developed markets is an unprecedented phenomenon for which we have no past reference points. All asset classes are expensive, so the relative valuations are not alarming. While liquidity has been countering the slowdown so far, growth needs to catch up. Given these push-and-pull factors, we expect markets to be volatile and expect 10 per cent returns from large-cap indices. 

What is your view on mid and small-cap stocks? 

There has been a significant underperformance of mid-caps and small-caps over the past 24 months. Relative valuations of mid-caps versus large-caps are now looking comfortable even though earnings growth is still evasive. Mid and small-caps will also benefit from lower interest rates. However, a lot depends on a broader economic recovery, and participation of local investors. If we continue to be driven by foreign flows, money will continue to chase large-caps and the polarisation will continue. 

We are in a midst of a slowdown and consumer spending has taken a hit. What is your reading of the situation? 

The high-frequency indicators continue to be sluggish and the bottom may not have been made in the September quarter. The winter crop prospects look promising, which could provide support for short-term consumption. The long-term consumption story for India cannot go wrong, given the demographics, but ultimately job-creation has to be the long-term driver, which needs investments to pick up in manufacturing, infrastructure and real estate. 

What are the global cues to watch out for? 

Continued Fed dovishness is the biggest variable to watch for, followed by oil prices and tensions in the Middle East due to friction with the US. The trade negotiations are likely to be a long-drawn affair which will be important only intermittently, from the market perspective. 

Do you see a recovery in corporate earnings any time soon? 

We expect FY21 earnings to grow a good 15-20 per cent. However, the growth will be led by below-the-line items such as lower tax rate, lower provisioning requirement of corporate banks and reversal of telecom losses. For a healthier, more sustainable rally, we need top-line growth to also come through to reflect overall economic growth. 

Which are the sectors you are betting on? 

We are positive on private-sector banks, both retail and corporate. While the retail bank theme continues, going forward even the private-sector banks with corporate exposures will likely do well. The bad phase on their corporate exposure is mostly past us. With adequate provisions been made and not much risky lending in the past few years, they are back on the growth path.

We are also positive on select NBFCs which are able to raise equity and debt, consumer discretionary (automobiles), materials, telecom, selected mid-cap names in capital goods and privatization as a theme. Energy is another sector, which could re-rate given the government’s privatization thrust, as valuations are comfortable. Metals could benefit if the US-China trade deal is finalised. 

We are underweight on FMCG, utilities and other PSU names where there is continuous supply of ETF-linked stocks.