We are Overweight on Cement & Consumption
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.
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.