‘Expect high single-digit returns from the market this year’
The March quarter (Q4FY18) earnings season has begun well with the information technology (IT) companies delivering healthy numbers. MIHIR VORA, director and chief investment officer, Max Life Insurance, tells PuneetWadhwa that for financial year 2018-19 (FY19), he expects earnings growth of 15-18 per cent, predicated on a recovery in earnings for corporate banks and commodity prices remaining strong. Edited excerpts:
What has been your investment strategy over the past few months?
We see consumption (auto, fast moving consumer goods or FMCG, etc), private sector financials (banks, nonbanking financial companies or NBFCs) and government expenditure as key drivers of growth this year. We’ve been increasing exposure to IT, as the US economy seems to be doing better than expected and corporate spend on investments and
IT is picking up. We remain stockspecific in approach as overall valuations are elevated.
How do you see the markets playing out over the next 12 months?
There will be bouts of volatility due to global and local factors. We expect
high single-digit returns from the market this year, in the base case. Upside or downside will be a function of growth — the economy needs to deliver the expected 7.5 per cent growth for the markets to deliver better than singledigit returns. Any disappointment in growth can see the markets correcting downwards.
What are your cash levels now, as compared to a year ago?
We are marginally higher in cash levels compared to benchmarks. We have been adding stocks depending on opportunities presenting themselves.
What are your current overweights and underweights?
The themes of consumption and government spending continue to be core to our approach. The other emerging trend is the pick-up of growth in the global economy, especially the US and to a lesser extent, Europe — this has implications on global commodity prices, IT services and exports.
Our current overweights are in consumer discretionary (automobiles), consumer staples (FMCG), industrials (construction, defence manufacturing), energy (refining, marketing), private sector financials, and metals. We are underweight on telecom, utilities and public sector banks (PSBs). Over the past year, we have reduced exposure to mid- and small-caps in our portfolios due to expensive valuations.
Your expectations from the Q4FY18 earnings season?
For the January-March 2018 quarter (Q4FY18), the net income growth is likely to be in single digits, implying full-year earnings growth of around 6 per cent for FY18. Margins (ex-banks, oil marketing companies) are likely to remain steady. The key monitorables will be the trajectory of earnings downgrades in corporate-focused banks and upgrades in automobiles and technology.
What are your estimates for FY19?
For financial year 2018-19 (FY19), we estimate earnings growth of 15-18 per cent, predicated on a recovery in earnings for corporate banks and commodity prices remaining strong. Besides banks, which constitute 50 per cent of the growth in earnings, metals and automobile segments are the major contributors. Therefore, in case the global recovery slips due to trade wars or some other risk, earnings in these sectors could be at risk.
What are your view on flows to the equity market?
The pace of growth for FY19 will continue to be robust, though a bit less than what we saw in FY18. This financial year had the impact of demonetisation where the banking system saw massive inflows and some of the inflows found their way into financial assets like mutual funds, insurance, deposits etc. That was a one-time event and has created a high base. Since that is unlikely to be repeated, the flows will taper off.
To what extent are the markets discounting the Bharatiya Janata Party’s (BJP’s) possibility of a loss in the upcoming assembly elections in Karnataka?
The situation appears to be a close contest between the incumbent and the challenger. The outcome of the elections may create volatility in the short-term. However, it may not necessarily be construed as a precursor for the 2019 countrywide elections. Once the dust settles after Karnataka, markets will start looking beyond towards 2019, fundamentals and economic growth.