We are Over­weight on Ce­ment & Con­sump­tion

The Economic Times - - Money - “Value as a in­vest­ment style has not worked in the last two years, be­cause growth is the clean­est fac­tor that in­vestors are look­ing for. Buy­ing high qual­ity com­pa­nies with low volatil­ity is a trade that has worked”

IIn­dian mar­kets are in a eu­phoric mood on good num­bers and ex­pec­ta­tions of a nor­mal mon­soon, said Anoop Bhaskar, head (eq­ui­ties), IDFC Asset Man­age­ment. In an in­ter­view to Prashant Ma­hesh, he, how­ever, said that glob­ally things have not changed, there are down­grades and there is a con­cern on growth. Edited ex­cerpts:

Nifty has ral­lied by more than 2% to­day and it is up 15% from the lows of 6825 in end Fe­bru­ary. Will these IIP, in­fla­tion num­bers lead to more rate cuts? Where do you see the mar­kets head­ing? Clearly, there is a lot of eu­pho­ria in the mar­ket at the moment af­ter the an­nounce­ment of bet­ter-than-ex­pected IIP, in­fla­tion num­bers and a pre­dic­tion of a good mon­soon.

How­ever, we must not for­get that the mon­soon is a four-month long event and just a pre­dic­tion is not enough. Know­ing the RBI gover­nor (Raghu­ram Ra­jan), I do not think he would look at cut­ting rates im­me­di­ately. Ra­jan would wait and watch as to how the mon­soon pans out.

Though the IIP num­bers have moved from neg­a­tive to a pos­i­tive 2%, we must re­mem­ber that these num­bers were close to dou­ble dig­its a few years ago and we are nowhere close to those num­bers now.

Glob­ally, things have not changed and there are down­grades of growth es­ti­mates and there is higher con­cern on growth. Also, In In­dia data points are not very sec­u­lar. Clearly, there is a di­ver­gence and there is not a full-blown re­cov­ery. There is a bit of a fa­tigue on earn­ings re­cov­ery over the last cou­ple of years. Will val­u­a­tions sus­tain at the cur­rent lev­els, given the slow pace of global growth? No bull mar­ket sus­tains with­out earn­ings growth. There have been seven in­stances in In­dian his­tory of bull cy­cles since 1980. Af­ter 2-2.5 years, the mar­ket peters off if PE ex­pan­sion is at 80% of the move in mar­kets. We were in that stage in Au­gust 2015 on large cap side. Post that there has been a large cor­rec­tion on large cap side.

Large­cap stocks to­day are split equally be­tween PE ex­pan­sion and mar­ginal earn­ings growth. From Septe­me­ber 2013, there has been a 34% move in Nifty and 98% move in mid­cap in­dex and 90% in­crease in small cap in­dex. How­ever in mid­cap in­dex there has been a 6% de­growth in earn­ings and 106% in­crease in PE. Clearly PE ex­pan­sion has driven the mid­cap seg­ment and not earn­ings. So if earn­ings do not come back, there could be a cor­rec­tion. On val­u­a­tion front, mid­caps are more sus­cep­ti­ble to a cor­rec­tion, but on flows front there is no worry, as re­tail in­vestors pour into seg­ment which has given you higher re­turn.

MID­CAP MOVES

Earn­ings growth is slow and looks some time away, where do you place your in­vest­ment bets? We are over­weight on ce­ment as that it’s the cleaner part of in­fra­struc­ture that you can bet on. In ad­di­tion to this, we are over­weight on do­mes­tic con­sump­tion. We are un­der­weight on banks and we would like to watch for the March quar­ter num­bers be­fore tak­ing a call. In pharma, reg­u­la­tory risk is some­thing which wor­ries us about do­mes­tic com­pa­nies and hence we have a very com­pany spe­cific ap­proach there. Value as a in­vest­ment style has not worked in the last two years, be­cause growth is the clean­est fac­tor that in­vestors are look­ing for. Buy­ing high qual­ity com­pa­nies with low volatil­ity is a trade that has worked.

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