'Current valuations are factoring in earnings growth recovery'
In conversation with Puneet Wadhwa, SAMPATH REDDY, chief investment officer, Bajaj Allianz Life Insurance says going ahead, the global easy liquidity period will come to an end. This will lead to a cut in flows to emerging markets, he says. Edited excerpts:
How do you see the global financial markets playing out in calendar year 2017?
Global financial markets would be dominated by news flow from the US viz. interest rates, policy of the new Trump administration. Overall, the global easy liquidity period will come to an end as the US is already in the tightening its monetary policy, we see the European Union (EU) also to end the quantitative easing (QE) this year, and all of this could lead to a reduce liquidity flow towards emerging markets.
What are the key events (global and domestic) that the markets are now looking forward to for a direction?
With the completion of the elections in the electorally important state of Uttar Pradesh (UP), the expectations would shift back towards the economic reform and policy measures that the government would undertake. The implementation of goods and services tax (GST) bill successfully by July would be an event to watch out for. Direction of the continuation of the policy measure would be the determinant of the extent of an upswing in the economic activity in the country.
Are the markets fully valued, or are you a buyer at these levels? How much cash (% of total) do you hold in your portfolio?
Current valuations are factoring in a good recovery in earnings growth. We are also hopeful the earning growth to accelerate in FY18. We remain buyers of stocks where we have visibility in profit growth for the coming couple of years and relatively valuations are attractive in large-cap stocks.
What are your estimates for corporate earrings for FY18 and FY19? Have you lowered estimates post demonetisation? If so, what is the reduction (bps) in estimates?
Profit growth for the Nifty50 companies has been flat over the last three years. On a low base, with an improvement in the demand scenario we would expect profit growth in the mid-teens over the coming couple of years. Poor asset quality of the banks that leads to higher provision costs has dragged down the aggregate earning growth in the past couple of years. Impact of demonetisation has resulted in a cut in estimates, but it has been much lower than what was initially feared. The note ban resulted in a delay in spending/expenditure, and hence, short-term profitability pressures would be visible which would then be compensated by a higher growth rate in the coming year.
Which sectors are you overweight and underweight on at the current juncture? Do you see a tilt in favour of consumption and banking sectors going ahead?
We are optimistic on the private banking sector which is viewed as a secular growth story with these entities gaining market share and enjoying attractive returns ratios. Commodity companies are also well placed with an uptick in global demand growth, falling inventory levels and improvement in prices.
What are your views on the developments in the telecom sector, and the road ahead?
Rapidly changing technology and consumer preferences would determine the success of an individual business model. This industry is evolving at a rapid pace and the increase in consolidation in the sectors with the impending merger of Idea and Vodafone augurs well.
Capital goods and consumer goods related stocks/indices have done well over the past few months. Is the tide turning?
Consumer stocks have seen an uptick with strong growth outlook. Impact of demonetisation has been minimal, as this exercise was conducted in the slack season for most consumer goods companies.
What is an ideal portfolio mix that you suggest investors should have given the domestic and global headwinds? Can debt outperform equity in calendar year 2017 (CY17)?
With the recent change in Reserve Bank of India’s (RBI’s) stance on liquidity, and rising inflation pressures we believe, the significant rally in the bond market is largely over. For this calendar year we thing yields to remain stable; hence we believe equities could outperform. However, the debt and equity asset class exposure for investors varies from the individual risk appetite and near-term liquidity needs.