Historical data suggest that a deficient rainfall has not necessarily resulted in negative equity returns, Joseph Thomas, Head of Research, Emkay Wealth Management, said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpts:
Q: How should investors tread waters now and what are the triggers to watch for?
A: In the budget, for the first time the government has given intended targets for the GDP number. This is a clear display of intent from the government as to what they want to achieve in terms of economic growth numbers.
Some of the so-called big-bang reforms and announcements relating to taxation have dampened market sentiments. But, we must bear in mind one thing, the response from the markets over the last week is not solely due to the budget announcements but also due to the weak global cues.
As we have seen in the last five years, the reforms have been more of an ongoing affair and not entirely always related to the budget. This budget is targeting higher growth.
It would serve investors well to re-assess their risk appetite and review their portfolios for any excesses. From an equity market perspective, investors are well-advised to maintain a staggered approach and should build a multi-cap portfolio.
The mid and smallcap space has remained weak whereas large caps and the better midcaps have held-up well until recently.
There are opportunities as well as risks galore and investors should refrain from taking any tactical positions just based on valuations alone. The key triggers to watch out for is the private capex cycle and the earnings recovery.
Q: Most of the auto stocks are under pressure and some of them are even trading below 200-DMA. What is your view?
A: While some might see it as an investment opportunity, stocks moving below 200-DMA are signs of further weakness. Having said that, auto stocks have seen a sharp correction on the back of some key fundamental concerns.
The demand slowdown has affected the sector and till the time there is some pick-up in numbers, valuations are not expected to see mean reversion.
Q: Do you think the government’s decision to borrow in foreign currencies could be a game-changer?
A: This adds one more avenue of raising funds for government’s fiscal borrowing, but we would not term it as a big game-changer. It is a double-edged sword and whether this reform turns out to be a bane or a boon would largely depend on the government and how the risk is managed, especially the currency risk.
Such borrowings can be structured in such a way that the issue is rupees only, like the euro-yen bonds. But risks to a large extent remains open.
Q: Indian companies are facing many challenges—governance issues (recent one being IndiGo), delay in monsoon, adverse budget proposals, and muted earnings season. How do you see the near term future?
A: Monsoons and budget proposals seem to be fleeting concerns and we do not expect them to have a lasting impact on market sentiments.
Historical data suggest that deficient rainfall has not necessarily resulted in negative equity returns. As you rightly pointed out – corporate earnings and governance-related issues are the more pressing issues at the current juncture.
The excesses of several years are now coming to the fore and getting reflected as corporate governance issues and in some cases even defaults.
The key thing to watch out is how these issues are handled and what kind of processes are set in place to minimize the reoccurrence of such systemic shocks.
Q: SIP flows are showing an encouraging trend even at a time when most MF schemes have given negative returns. What is your outlook?
A: Hot money coming into the markets mainly based on past returns can slow down or even see exits. So investments can slowdown from these sets of investors.
The bigger trend that has developed over the years is the financialisation of savings and within this, the shift is happening from traditional investments like FDs and insurance to mutual funds.
There can be some blips but overall we believe the long term investment will continue to find its way to equity markets.
Q: If someone wants to invest Rs 10 lakh now, what should be the portfolio contribution with respect to equity, FDs, gold and debt?
A: We have been saying this time and again, asset allocation should not be based on the market scenario. It should be an outcome of risk appetite and the investment life cycle (accumulation, preservation, and transmission).
In recent times, we have seen that many of the investor’s portfolios are underweight on gold, given the underperformance over the past few years.
Given the growth headwinds globally and the central banks reverting to being accommodative, the prospects for gold can improve going ahead.
While equities may be the major component, gold may be a very small part of less than 5 per cent exposure. The rest may be in debt.
Q: Due to the new tax proposal in budget, KPR Mill announced the withdrawal of buyback of 37 lakh shares announced in June. Do you think there will be more casualties like these?
A: The proposal can lead to further withdrawals of buybacks in the near future, but we would not term them as casualties. There remains the old route of distributing cash surplus by way of dividends, which can be relatively cheaper as compared to buybacks.
If we go by the comment of Finance Secretary that “objective was to close the arbitrage…the intent is to encourage investment”, and if this is followed in spirit by the corporates we could see some pick-up in investments.
Q: What is your call on June quarter earnings?
A: We do not expect a swift reversal in corporate earnings. The weakness in sales, as well as profitability, can continue in the June quarter earnings season as well.
