Gautam Sinha Roy, Associate Director & Fund Manager, Motilal Oswal AMC, is of the opinion that macro uncertainties have reduced considerably. He also feels that earnings of companies (BSE 500) would improve in the next one year. Excerpts from an interview with BusinessLine:
Given that elections, geo-political tensions and macro uncertainties are on the horizon, should investors be betting on defensives for now before clarity emerges?
The only material uncertainty to my mind remains the election results. Here again, the uncertainty today is far lower than what it was a few months back when we were heading into the four major State elections. The key macro variables including crude oil prices and inflation are in the benign zone. Interest rates are definitely looking to head lower, going forward.
Broader market valuations are also not as demanding as they were one year back. There are bottom up stock-picking opportunities. In this environment, investors should start dipping their fingers in risk assets with a keen eye on valuations and the merit of the stock they are evaluating.
Is the worst of the credit events/NBFC crisis behind us? Given that liquidity is still tight, how do you read the scenario?
The excess growth in short-term paper funded NBFC assets in the last few years has resulted in asset quality issues in pockets such as real estate (LAP) funding and construction finance. Some haircuts will need to be taken to resolve these issues. Micro-markets where real estate inventory is too high will take longer to resolve. So the problem will get solved, but will take time and will result in some markdowns which participants will have to bear.
The tight liquidity situation is a phase which should get sorted out with time. This is creating some pressure on the liability side of financial companies, especially ones with ALM (asset-liability) mismatch and perceived issues on the asset side. Banks with a strong liability engine are well placed in this environment.
Mid- and small-caps have been hammered in the last one year. Is it time to cherry pick now? Is there significant valuation comfort now?
While valuations of mid- and mall-caps had been very expensive, after the sharp correction in the last year, we can find select opportunities in these categories. The approach has to be one of bottom-up stock picking as the opportunities are select. It is yet not the case that valuations are inexpensive across the board.
Profit growth of listed companies (BSE 500) continues to disappoint. When is a revival expected?
The coming year should see a stronger growth in BSE 500 earnings. The big draw down in earnings around a year back had come from the corporate banks pack. These banks are now seeing a normalisation of earnings, which should have a huge impact on incremental index earnings.
Is the consumption story likely to strengthen over the next year or so? After a spate of government cash transfers, is rural demand likely to improve?
Since the nature of government cash transfers are low ticket and are going to the poorer sections of rural society largely, this should aid bottom-of-the-pyramid consumption in a meaningful way. The total transfer quantum is pretty large at ₹72,000 crore. Given the large size and the fact that these are direct cash transfers, we expect this to have substantial impact on consumption demand and a further domino effect on economic growth.
Which are the segments that you are betting on for the medium- to long-term? Are there any sectors that you are avoiding consciously?
We are bottom-up stock pickers and like to invest in great businesses for the long term based on the quality of those franchises, the long-term growth and hence, wealth creation opportunities as well as the price value mismatch available currently. We are currently avoiding the global cyclical sectors (such as metals) and domestic sectors where pricing power is weak due to regulatory and competition-related uncertainties (such as telecom).
Please Email the Editor