Markets have remained resilient over the past few sessions despite the election-related uncertainty. SAIBAL GHOSH, chief investment officer at Ageon Life Insurance tells Puneet Wadhwa that the ‘India growth story’ is much more compelling now than rest of the globe, and it is expected to remain that way in foreseeable future. Edited excerpts:
What is your market outlook for the remaining part of the year?
The markets are likely to remain volatile till the time general election is over. While we are trying to keep our portfolio less volatile in the short to medium term, the underline theme in our portfolio remains constructive. Major reforms have already been implemented in the last four years, which will propel growth going forward. Corporate earnings should start to look up from the next financial year. Besides two big risk factors for the market in the form of higher interest rates and falling rupee are now, hopefully, behind us. So, wherever valuation permits we are buying with two to three years view.
Where do you see opportunities in the current market?
Mid-cap space represents India growth story more powerfully than the large-caps. We see great opportunities in select mid-cap pockets after the recent correction. I want to make a point here that notwithstanding the recent underperformance over five to 10 year scale, midcaps have reasonably outperformed their large-cap peers. This is understandable, as the ‘India growth story’ is much more compelling now than rest of the globe, and it is expected to remain that way in foreseeable future. The mid-cap story will play out again once the cost of funds at which these companies borrow to fund their business comes down from the current levels.
So, which mid-cap segments do you like?
The ecommerce space is not adequately represented in the bourses. This is one likely winner and we may see a few companies get listed in the days to come. I am also quite positive on hotel and retail sectors.
Can you elaborate on your corporate earnings growth expectations?
The earnings growth is a function of nominal GDP growth, which has been moderating in the last few years. The nominal growth numbers have now decisively shifted downward to 10 to 11 per cent in the last five years. While we have witnessed almost stagnated earnings growth in last four years, going forward the earning cycle (in large-caps) is expected to turnaround. That said, a large part of this earnings growth in FY20 will not come from domestic growth factors, but from non-performing asset (NPA) resolutions of banks and major contributions from sectors like information technology (IT), which has nothing to do with domestic growth. However, a visibility of 15 to 18 per cent earnings growth of Nifty 50 stocks in FY20 is quite strong at the current juncture.
Markets believe that the ruling dispensation will return to power post the general election. What do you think?
At the current level market is pricing in the ruling party to return to power with may be lesser majority. To put it other way, the markets is not pricing in a coalition / Third Front to come to power. However, empirically we have witnessed that over the longer run, it does not matter who the ruling party is as long as it adopts developing policies.
Over the past few years, markets have been supported by flows from the mutual fund and insurance segments. Do you see them taper off going ahead?
There is no doubt that the flows are slowing down after an initial spurt and this was expected. However, while the flow may taper off marginally but I expect it to continue as people’s confidence in financial savings is growing due to fall in inflation, better awareness of institutional products and demonetization of transactions. This is also evident in the fact that while overall household savings in India has been coming down in last five years, but financial savings remains largely resilient.
What has been your investing strategy over the past year?
We have an extremely process driven approach in investments. We have a very well-defined investment universe which we arrive at after applying some stringent filters around the fundamental strength of a company on account of its business model, financial parameters, management quality and governance standard. Depending on the mandate (large-cap, mid-cap or flexi-cap), fund managers then construct their portfolio by picking up stocks from this universe. As a matter of policy, we do not maintain large cash in our portfolio.
How many rate cuts do you expect from the Reserve Bank of India (RBI) in CY19?
Inflation in India, especially the food inflation which is almost half of Consumer Price Inflation (CPI), has been coming down significantly in last few years. Food inflation which was around eight to nine per cent level five to 10 years ago, has now come to an average of less than two per cent in last couple of years. A large part of this fall is structural in nature. Given that inflation is expected to remain benign and consumption demand has been slowing down considerably in last three months, there is a case for a deeper rate cuts and accommodative monetary policy through infusion of durable liquidity.