We have been deploying money at every correction, says Jyoti Vaswani

Corporate earnings recovery would be a key positive for markets, says Jyoti Vaswani

The sharp drop in the market from the 2018 highs provided an opportunity to buy good quality stocks at reasonable valuations, says Jyoti Vaswani, chief investment officer, Future Generali India Life Insurance. In an interview to Samie Modak, Vaswani says 2018 will be a stock-pickers’ market and one should buy high-quality stocks with earnings visibility. Edited excerpts:

Volatility has gone up and is expected to remain high this year. How does one play the market? 

After a relatively tranquil 2017, we believe this year will be volatile for the equities. The market could undergo time correction as there will be several headwinds such as rising crude prices, yields and political uncertainty. However, tailwinds in the form of economic growth, earnings recovery and strong domestic liquidity will help the markets tide over the volatility. The Nifty currently is trading closer to its long-term averages and is not expensive, given that earnings are bottoming out. The growth in earnings this fiscal could be between 15 per cent and 20 per cent. We remain constructive over medium- to long-term and deem every correction as an opportunity to invest in good quality stocks.

What are the key triggers for the market?

Corporate earnings recovery would be a key positive for markets. After subdued earnings growth in 2017-18, the earnings growth trajectory should pick up this year. Prediction of a normal monsoon will augur well for rural-focused stocks. On the macro front, growth may surprise on the upside as green shoots of capex recovery are conspicuous, especially in sectors such as steel, cement and refineries. Domestic liquidity still remains robust, as monthly systematic investment plans (SIPs) in equity mutual funds (MFs) remain strong.  

The recent surge in crude prices poses one of the biggest threats to markets, as it would worsen macro variables such as inflation and twin deficits and currency. Besides the mounting concerns of trade war, reduction in global liquidity and political developments as key states go to polls this year, will be key factors that will drive the market.

What’s the cash position at the insurance industry and Future Generali Life Insurance in particular?

With financialisation of savings after demonetisation, the insurance industry has been one of the key beneficiaries of this shift, as it has witnessed robust growth in premium inflows in 2017. Given our positive stance, we don’t think there is a need for keeping cash in portfolios. We have been deploying money at every correction. Markets may not be inexpensive now but there are enough investment opportunities. We believe proper stock-picking will be more rewarding this year, unlike the previous year, which was characterised by a broad-based market rally. So bottom-up stock selection will be the mantra in 2018. We prefer quality stocks that provide earnings visibility at reasonable valuations.

Which are the sectors one should bet on and the sectors you would avoid?

We expect an uptick in consumption, both rural and urban. Public capex will drive the growth. We have a positive view on consumer discretionary sectors such as autos and consumer goods since the rural economy is expected to do well, given the government’s focus and pre-election spending. We also prefer the cement sector, as it will be a direct beneficiary of higher infrastructure spending. Firm commodity prices globally should augur well for the metals and mining sector. In the banking space, we prefer selected plays such as private retail-focused banks. While we remain cautious on sectors such as oil & gas, telecom and power, higher crude oil prices could pose problems for upstream and downstream companies in terms of additional subsidy burden. For the telecom sector, the recovery in pricing power for the incumbents seems to be sometime away, since the tariff war may continue for a few more quarters.

Foreign flows into Indian markets are tapering as global central banks are normalising their monetary stance. Can MFs and insurance companies offset FII (foreign institutional investor) outflows? 

Equity MFs are receiving nearly $2 billion of net inflow every month. This should be adequate to counter adverse foreign outflows into Indian markets due to tightening of monetary policy by global central banks. With new investors getting added every month to the SIP category, inflows are now above Rs 60 billion a month, reflective of a structural shift in preference of domestic investors towards equity as an asset class, compared to gold or real estate. This gives us confidence that domestic liquidity is here to stay, which augurs well for Indian equity markets. Insurance companies have seen good inflows into Ulips (unit-linked insurance plans) in 2017, which is expected to continue this year.