Bullish on IT, private banks; pharma may have bottomed out, says Allianz’s Reddy (2024)

Market breadth has been largely negative recently since mid and smallcaps have seen major correction. So, stock-picking has played an important role so far this year in generating returns or alpha, and we believe that it will continue to be the case, going forward as well, Sampath Reddy, CIO, Bajaj Allianz Life, said in an interview with Moneycontrol’s Ksh*tij Anand.

He said India faces some macro headwinds like elevated and rising crude oil prices, rising interest rates, and inflation. Edited excerpt:

Indian markets created history in July which got carried forward in August, as well, as both Sensex and Nifty touched fresh milestones despite some global headwinds. How are you reading the breakout?

Markets have moved up on the back of a recovery in corporate earnings. Consumer sector has seen the pick-up in volumes, IT has benefited from a depreciating rupee, and private financials have mostly delivered results which were in-line or better than expectations.

Further, domestic liquidity has also been strong and helped to counter the foreign outflows that we have seen over the past few months.

Another point to note is that CYTD 2018 has been a very narrow market. A handful of stocks have contributed to most of the gains in the benchmark Nifty index.

Meanwhile, the mid/small-cap space has seen a substantial correction on a YTD basis in 2018, as a result of which the market breadth has been largely negative.

Hence, stock-picking has played an important role so far this year in generating returns or alpha, and we believe that it will continue to be the case, going forward as well.

Is the peak similar to 2008 peak which did not last long? We are heading towards a crucial election year. Does it require investors to be cautious at current levels?

In the near term, markets could be volatile, due to various headwinds like rising crude oil prices and its impact on the twin deficits, rising interest rates, and inflation.

There is some uncertainty on the global front as well—such as: Global trade war, tightening of monetary policy by major central banks, and risk aversion in emerging markets.

So the short-term picture is a bit hazy, and as always-- it is difficult to predict what happens in the market in the short-term.

Investors can continue to invest systematically in equities, but should tamper down their return expectations this year, when compared to 2017.

Over the long term though, the equity markets will track corporate earnings growth. We do not see similarities to 2008 peaks in the market as of now.

Any anecdotal evidence which suggests that the rally is here to stay or we could see a big sell-off in near future?

We do not worry about the market scaling new highs, as the market is tracking recovery in corporate earnings growth. Over the past few years, market returns have largely been contributed by P/E expansion, as corporate earnings growth had been muted.

However, going forward, we expect corporate earnings growth to recover meaningfully in FY19 and FY20, on the back of recovery in earlier underperforming sectors.

Therefore, we believe that future market returns are going to be guided by corporate earnings growth rather than PE expansion.

Also, historical data shows that there is a good correlation between earnings growth and market returns over the long term, although there could be intermittent divergences in the short term.

As Benjamin Graham famously said – “In the short run, a market is a voting machine but in the long run, it is a weighing machine.”

Any top 5 risks which India market faces in the next 12 months?

Broad macro-economic data and high-frequency data point to a recovery in economic growth. However, as mentioned earlier, some macro headwinds remain like elevated and rising crude oil prices and its impact on the twin deficits, rising interest rates, and inflation.

Global uncertainty on escalating trade war, tightening of monetary policy by major central banks, and global risk aversion in EM markets/currencies, also remain.

Amid historic highs, which sectors are likely to hog the limelight and is safe for investors to park their money?

The sectors that we are positive on presently are IT, Private Financials and Consumption.

IT has benefited from the rupee depreciation, consumption is showing a rebound with a pick-up in volume growth.

We continue to like private financials, with credit growth picking up and Pvt. banks continue to gain market share from their PSU counterparts.

Pharma is another sector, which we feel may have bottomed out, with a large part of the FDA related issues being a matter of the past. Also, as an export-oriented sector, the weaker rupee will also aid it further.

What should be the ideal portfolio contribution (in terms of percentage) of investors especially at a time when markets are trading at record highs? Assuming the investor is in the age bracket of 30-40 years.

The allocation in the portfolio will largely depend on the individual investor’s risk profile and investment horizon, and varies from person to person, based on that. However, for the age bracket mentioned, the investor will still be in his/her early to mid-earning years of the life cycle. ‘

Therefore, the investor can consider a large allocation to equities as part of their asset allocation plan (based on risk profile and investment horizon of 5 years and above), as equities is one of the top performing asset classes over the long term and help in long-term wealth creation and in beating inflation.

What is your call on midcaps now? Do you think they are worth a look now as momentum should also get into the broader market?

Since late last year, we have been highlighting in our communication to investors that small/mid-cap stocks are trading at a significant valuation premium to large-cap stocks.

YTD in 2018 we have seen a significant correction in the small/mid-cap segment when compared to large-cap segment/indices, which actually delivered positive returns.

To put some numbers in perspective, the forward P/E ratio of Nifty Midcap 100 index was at around a 70% premium to forward P/E ratio of Nifty 50 index in the beginning of this year.

With the recent correction, the valuation premium has come down to around 20% at the end of June 2018.

However, we still find the risk-reward for large-cap equities more favorable, as small/mid-caps have historically traded at a discount to large-caps over the long term. Having said that, some of the midcap companies have also come to attractive price levels.