Betting on pvt financials, industrials & discretionary consumption: BOI AXA MF

Alok Singh, CIO, BOI AXA Investment Managers, said expectations over election results will continue to induce volatility in the market all through the year, with better operating performance providing a counter balance.

Among sectors, he is betting on private financials, industrials and discretionary consumption.

Edited excerpts:

Q: The market is at record levels and not showing any signs of a sharp fall. Do you see the possibility of a 5-10 percent rally from here on? If yes, what could drive it?

A: The Q1 FY19 result season has ended well, with a pick up in volumes and expansion in margin. The strong operating performance and continuous inflows by domestic investors has supported the frontline market.

The market also witnessed a divergence in recent times, with the largecap index touching a 52-week high while most mid- and smallcap stocks trading near their lows. This may give an impression of high price-to-earnings at index level but the broader market valuation is reasonable.

We are not expecting any sharp correction. If this business performance sustains in coming quarters and both local and global macros remain stable, then we may see the next leg to the market rally.

Q: The rupee hit record lows last week but managed to reverse some losses. Do you think the correction is done for now or is a further depreciation likely in the short to medium term?

A: India is a high inflation country compared to the US, so on a purchasing power parity basis, the rupee has to accordingly depreciate somewhat every year. Since the Indian economy is doing far better than its peers, its currency gets somewhat of a premium. Therefore, the rupee has been a little overvalued for some time now. Despite the recent depreciation, the Indian unit has done far better than many of the emerging market currencies. We think the rupee is reasonably placed around 70 against the dollar.

Q: Do you consider the US-China trade war as a major risk for the Indian market?

A: India is reasonably immune to a US-China trade war. In fact, it can be a beneficiary of a full blown trade war, because global commodities, including oil, will become cheaper. It will help India control its import bill and some of its production capacity may also move from China to India. In the present global environment, I don't see a possibility of a full blown trade war happening.

Q: How do you read the June quarter earnings season and what are you expectations for FY19?

A: The June quarter earnings were quite encouraging and the management commentary was also quite positive for most sectors. We expect FY19 to be an excellent year in terms of earning growth. The irony is that when we are seeing an improvement in financial performance and positive commentary about the business from the management at large, the market seems to be worried about many other things.

Q: Could the market turn more volatile as we move closer to state as well as general elections or is it pricing in these events in advance?

A: Financial markets have very little patience, they try to discount the event in prices as soon as possible. Great amount of current volatility can also be contributed to anxiety about a possible election outcome. We expect election result will continue to induce volatility into the market all through the year, with better operating performance providing a counter-balance.

Q: Mid- and smallcaps recovered from their recent lows, but many are still away from their 52-week highs. Do you think mid- and smallcaps are reasonably valued?

A: The recent correction has moderated valuations for mid- and smallcaps. Recent correction along with the improved business dynamic make many stocks attractive for the long term. It is not right to evaluate individual stocks with generalised P/E. Valuation has to be looked at in view of the business dynamics.

Q: What is your view on private as well as state-run banks, IT and pharma sectors after the Q1 earnings?

A: Things have started improving for corporate lending, but it will still take them some time to recover fully. Till such time, things can be quite volatile.

IT has starting reorganising their business model and some results are visible in the June quarter results. But one cannot go with a generalised approach and each business has to be evaluated individually.

Pharma is something that has to reinvent quite a lot right from processes to products and all of this takes time. Hence, we are still some time away from being positive on the sector.

Q: Can you list out your top sectors?

A: Private sector financials: The private sector has continued to gain share from large banks in both current account-savings account and loans over the past few years. We expect this trend to continue in the foreseeable future as state-run banks would continue to grapple with stressed asset provisioning and under capitalisation. Earnings growth in private sector financials, especially retail oriented banks and non-banking financial companies, would far outstrip state-run banks.

Industrials: China initiated widespread capacity shutdowns over the past year across metals, chemicals and agro-chemical sectors in a bid to shut down all environmentally non-compliant units. This trend is likely to accelerate the growth for Indian companies in these sectors as cheap Chinese supply gets off the market and demand supply dynamics turn favourable. We expect chemicals, metals and metal consumable sectors to continue to do well.

Discretionary consumption: We see signs of discretionary consumption reviving well. The combination of a growing aspirational middle class and under penetration in almost all consumer discretionary categories (cars, white goods, ACs) bodes well for the sector. We expect companies within this sector to see health demand growth over the next few years.