Continued Political News Flow will Result in an Upside Cap
Aashish Somaiyaa, CEO of Motilal Oswal AMC, talks to Teena Jain Kaushal on a range of issues that could influence the capital market in 2018.
Q: What are the key challenges facing the Indian market going ahead?
A: I believe FY19 will be challenging without a doubt due to political developments. Markets do not like uncertainty and prefer continuity, irrespective of the political environment. Continued news flow on the political front will result in an upside cap on the markets. On the other hand, relative deterioration in macros, external conditions and some acceleration in demand will result in rising interest rates making fixed income a relatively attractive asset class compared to the recent past. All of this will result in range-bound or at least significantly lower returns in equities in FY19. From a fund management perspective, this is not bad; it is, in fact, a welcome relief because stock pickers like us do better when the market doesn't do too much. We don't look smart when the whole mid-cap and small-cap index goes up by 40-50 per cent in a year and the Nifty goes up 27-28 per cent in a single calendar year like it did in CY17. Nominal returns may look good, but the best of managers would struggle to outperform when a 100 stock index goes up 40 per cent in one year and everything that is contra, cyclical, deep-value and beaten-down rises like a phoenix.
Q: What is your take on valuation of the market after the recent correction?
A: One can imagine that multiples should compress with rising rates, political uncertainty and macro challenges. But we are in a scenario where just when earnings are showing high double-digit growth with great promise of sustenance, we have already seen the mid-cap index correct by about 15 per cent from its peak in January 2018 with many stocks down by as much as 30-40 per cent. There is always scope for 5-10 per cent more when market gains momentum in either direction, but it's a good time for discerning stock picking. There could be time corrections or price corrections. We have already seen a sharp price correction, and with rising earnings and further time correction due to political news flow, good value will emerge in next the few months.
Q: How do you look at the large and mid-size segments?
A: To capture growth of companies, one has to either have superior hypothesis of growth or at least a longer holding period. The starting point is not large or mid-cap. In fact, some of our biggest successes have come when bought the upper end of mid-cap and held through patiently without reacting to prices and PEs as long as the earnings growth trajectory played out. On the other hand, good large-caps can be scalable; but, in the last three years, all accidents seem to have happened in the large space and not much of it is out of the woods - look at the IT growth slowdown, pharma compliance and pricing issues, huge volatility in metals and commodities, the PSU bank debacle and telecom war. Meanwhile, the domestically oriented mid-caps in relatively secular sectors did very well. My point is that market trades on multiples of annual earnings and multiples can only be paid for visibility which comes from rate of growth, low volatility of growth and length of growth. We need to set aside the cap bias and look for portfolios with good stocks.
Q: Long Term Capital Gains have returned? How will it affect the mutual fund growth story?
A: It's a tax on outcomes and if the investment proposition is attractive the tax will not deter anyone. Practically, I don't see any impact except for near-team adjustments.
Q: How much return can one expect from the stock markets in 2018?
A: If one looks at CY18, it would be nil; but since we have already witnessed more than 10 per cent correction from the start, here on, one can get a small return. I don't think this number is of any relevance except for people who needed money and wanted to sell within this year; it's not a good exit point for sure. On the other hand, even if there is no change in market levels or in stock prices for companies that we own, we know that the underlying businesses are accumulating value as their earnings continue to rise.
Q: How has your view of the banking sector changed after the PNB scam?
A: We did not have any exposure to PSU banks in the last couple of years. That was not a stock specific call, but because we look for growth potential, we felt the sector was not out of the woods. Even today, there is not much clarity, and the process of booking losses continues. The surfacing of this scam has only resulted in further uncertainty about possible hits coming from another direction - eventually it may turn out to be a case of a few bad apples (employees) and a weak process limited to a particular bank. At some point, the PSU banking sector will surely see value emerge because you expect some provisions will come back to P&L as write-backs, if the recovery process is successful and further losses are stemmed. It happened in 2005-06. But there is lack of visibility on whether growth will emerge and how they will come out of the shock of the last two-three years. The long term trend has been of share migrating from PSUs to private banks, and the aggressive capital raising move of one of the large private banks may be an indicator of the times to come.
Q: What strategy should debt investors follow at this stage?
A: When someone from my industry advises a SIP for six/12/18 months, that too in debt funds, it means they are expecting you to lose in that time frame due to huge volatility. Investors should not get into playing with fixed income markets because, after all, that adventure will give you high single digits at best. As far as fixed income is concerned, my advice would be to remain with ultra short term or conservative short term debt funds or accrual-based funds, and not venture into long duration. For playing the markets, equity, which is anyway a risky asset class with high return potential, is good enough.
Q: What are some of the best sectors to invest in 2018?
A: Our largest allocations are in private sectors banks, insurance companies, consumer staples, consumer durables, autos, oil marketing companies and select capital goods companies.