Even the macros seem to be a bit unfavourable, there has been a crude oil price inflation, there is rupee weakness and a lot of global headwinds as far as trade tariffs goes and several other factors. What should ideally be the strategy for investing in a market like this?
There are challenges on the global side whether it is in terms of trade wars happening or general global weakness or even the US hiking rates. On the Indian side, the macros are not looking that great, especially if you look at the qualitative aspect.
We are now in the last year of the current government. With the election coming in, there is likely to be more nervousness in the Indian markets. For the next two three quarters, I really do not see the markets going up in a significant way. In fact, our view is that it will probably be range-bound with a negative bias. Our focus in terms of the current portfolio is to look out for sectors where the valuations are quite reasonable and where there is earnings growth ahead irrespective of the change in government or some of the macro factors that I talked about.
A corollary of what you are saying with a negative bias perspective could also mean that you are not expecting much from this earnings season?
Yes, the earnings season will probably be a different story. You would have some amount of earnings growth because we have had a very low base, especially on the consumption side of the sector like FMCG or pharma or on automobile which was impacted by GST.
Apart from the fact the global oriented sectors say like resources or energy is also expected to do well this quarter. I do not see any issue as far as the results are concerned, I think we would be having a good amount of growth as far as the earnings is concerned but my worry mostly stems on the sentiment side which is bad both from a global and a local perspective.
Also, one needs to keep into mind that the current valuations which are probably 17-18 times one year forward, already factors in a reasonable amount of growth. In this quarter, if we give a 15-20% growth, that may not see a significant level of rerating happening just because we have grown by 10-15% or upwards of 15% after a long time.
What would be some of the stocks that you think are reasonable or are poised to do better once the volatility cools down a bit?
I am looking primarily at three sectors; one is the private sector corporate banking side where I believe a large part of the pain is behind us and also the valuations are extremely reasonable now on a long-term perspective. These banks have the capital to grow for the next three to five years that is the first point that I am making.
Second is utilities. It is a significant overweight in my portfolio. This is also a sector where I see decent growth ahead because this is a proxy to the overall domestic industrial recovery as well as domestic demand and this is one of the very few domestic oriented sectors which is probably trading at very attractive valuations, ignoring the growth that this sector has to offer over the medium term.
Third is pharmaceuticals which has done well of late. Here also we believe that we are in an inflection point where there is going to be some amount of earnings growth, primarily led by the Indian markets which should start seeing growth from now on.