Earnings must play catch-up for market to sustain, says Mitesh Dalal

Backed by liquidity from foreign flows, benchmark indices have scaled new highs over the past few sessions. Mitesh Dalal, director and chief investment strategist, Standard Chartered Securities, tells Puneet Wadhwa that election results, crude oil prices, and the overall global economic slowdown are some of the other factors, besides earnings recovery, investors need to keep tabs on. Edited excerpts:

What’s your market outlook for the rest of 2019?
 

Market sentiment changed after the announcement of the election dates. Foreign portfolio investors are buying aggressively. Domestic institutional investors have turned sellers after a long time. The market rally is in anticipation of a favourable outcome in the general election, encouraging US-China trade agreement, dovish stance by the US Federal Reserve, and geopolitical tensions with the neighbouring country now on the back foot. 

The market direction will be decided by the fourth quarter earnings for 2018–19 (Q4FY19) and the outcome of the general elections. While both these will have an impact on the markets, an unfavourable election outcome could lead to higher volatility that may not last long. We are bullish on the market from a long-term perspective.

How long do you think foreign investors will continue to pour money into Indian equities?
 

Earnings will have to catch up for the markets to sustain at the current levels. Q4FY19 results will tell us more about the earnings cycle, which, in turn, will determine the flows. Also, we have to be mindful of the election results, crude oil prices, and the overall global economic slowdown that may have their impact on the flows and the market.

What has been your investing strategy thus far in calendar year 2019 (CY19)?
 

We have suggested our long-term clients take the benefit of the volatility and invest in a staggered manner. We have been overweight on private banks, insurance in the financial space, and digital services segment in the information technology sector; neutral on public sector banks (PSBs) and consumer discretionary; and underweight on oil and gas, and the utilities sectors.

How comfortable are you with the overall market valuation?
 

The Nifty50 is trading at a historical price-to-earnings (P/E) of around 28 times and forward P/E of around 18 times one-year forward. In the current environment, we believe volatility will be high and would prefer a bottom-up approach rather than looking at the market as a whole. The mid-cap and small-cap indices have been beaten down from their peak and there is value in select mid-cap stocks, which cannot be ignored.

Have the banking stocks run ahead of the fundamentals?
 

We have been ‘overweight’ on private banks for quite some time now and have gone ‘neutral’ on PSBs in January 2019. PSBs selectively can do better since the government has infused funds and some banks have come out of prompt corrective action. As far as valuations are concerned, a lot of money is chasing the few names in this sector that have shown resilience in bad times and delivered earnings. Hence, funds are flowing towards these names.

What’s your advice to investors, given the developments?
 

Long-term investors in the equity segment can benefit from the volatility, while short-term investors can play the momentum and exit at appropriate levels. The clarity, we believe, will come after the election results. Prior to that, earnings will guide the markets. We also have to be watchful of the monsoon, as the El Niño ghost is looming large, though it is too early to confirm anything.