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FY20 may belong to mid-and small-caps, says Anand Rathi's Pradeep Gupta

Chirinjibi Thapa/New Delhi 14 May 19 | 06:30 AM

The valuation of mid-and small-cap stocks corrected heavily, by an average of 40-50 per cent, in 2018. However, PRADEEP GUPTA, vice-chairman of Anand Rathi, believes these two market segements are in a recovery mode and may benefit from a positive growth in Indian economy and corporate earnings. Edited excerpts of an interview with Chirinjibi Thapa.

What's your outlook for the market in financial year 2019 - 20 (FY20)?

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Stock markets ended FY 18-19 on a good note with the S&P BSE Sensex rallying 17 per cent and Nifty50 gaining 15 per cent. A bulk of these gains came in the month of March 2019. I am bullish on Indian equities from a long-term perspective. There have been some posotive developments at the global level, such as the Chinese manufacturing PMI (Purchasing Manager's Index) surging over 50, positive credit growth in China and the strong labour market in US that suggest stronger-than-anticipated growth in the second half of 2019. Similarly, with inflation being benign, neutral monetary policy, liquidity is comfortable and fiscal policy is accommodative across the world.

Domestically, I feel that the economy will start growing and corporate earnings will accelerate and grow more than the earlier years. The reform process being implemented in the past four - five years is going to yield some positive results from the second half of this year. Intermittent volatility due to general elections, occasional profit booking, and global developments such as US-China tariff war, Brexit, central banks’ policy decisions and oil prices cannot be ruled out. So, based on all these parameters, I am bullish on equities from a long-term perspective, which is for at least next three years.

Sectors you are positive on and why?

I feel the results of reforms implemented in the past five years will be visible and felt in the economy. After four tepid years, earnings appear set for a recovery, especially led by banking, with credit growth pick-up, the return of pricing power, moderation in fresh slippages and lower credit costs. This should drive profit and return on equity (RoE) recovery for Corporate Banks. By 2019-mid , we should start seeing some improvement in corporate investment cycle, which will further accelerate the growth. I am positive on infrastructure, pharma, private banks / non-bank finance companies (NBFC), speciality chemical, fast moving consumer goods (FMCG) and information technology (IT) sectors.

The market has become quite narrow and the rally has been driven by select stocks. Do you see this changing after elections?

Whenever there is uncertainty, the market activity level comes down drastically and people tend to wait for more clarity on various situations. This is what is happening right now. There have been sectors that have delivered strong earnings in the fourth quarter of the last financial year (Q4FY19) like IT, selective private banks. These should continue to outperform post-election results as well. Once there is more clarity on political leadership, people will start taking an investment call and also start looking at fundamental factors to participate in market.

What's your view on mid-cap and small-cap stocks? Do you think valuations have turned attractive after correction in 2018?

India is still a growing country where most of the companies are in mid-and small-cap categories. The impact of positive growth will give larger advantage to this sector and hence I believe there is always going to be a better story for mid-and small-cap (selectively based on fundamentals). This financial year (FY20) might belong to mid and small-caps, for having handled the last period of slow businesses due to tight liquidity, subdued sentiments, global environment, which impacted the valuation and growth.

Mid-Cap indices seem to be in recovery mode in the current year vis-à-vis the last year. We have seen the valuation of mid-and small-cap stocks correct heavily, by an average of 40-50% in the year 2018, in recent times, which were going higher earlier with the same rate. I feel now valuation of many such stocks came to a level where investments in such companies look attractive. My advice would be to take a long-term view on such stocks to get a better growth perspective.

The consumption space is witnessing a slowdown. Your take on it. Also, do you see any recovery in the coming quarters? 

There is broad-based slowdown witnessed across sectors, including in consumption, over the previous quarters. The impact of global economic slowdown and domestic economy due to initial hiccups in implementing policies, rural consumption has also been slowing down.

We believe that new policies and realignment of tax alignment for salaried employees and largest support for agricultural and farming income should help push the consumption story. I believe, in the coming quarters, the same should start reflecting.

Post elections, we expect the consumption space to pick up depending on the policies and reforms taken by new government on the basis the already established fundamentals. That apart, monsoon will play a vital role for consumption revival and MET expectation is rainfall of 96 per cent of long-term average.

Donald Trump's tariff threat to China has spooked the markets across the globe. How do you see this panning out in the long-term?

Almost a year post the US threatened the trade war, Donald Trump on Friday hiked tariffs to 25 per cent on around $200 billion worth of Chinese Exports. US and China are the world's biggest economies, thus the detrition in their relationship may have an impact globally.

It is very difficult to predict the strategy and view of any of economy and their leaders. However, we have been witnessing from the past few years that world over all the economies are trying to protect their country by bringing various tariffs controls and restrictions on the trade side.

In my opinion, this is not a good and progressive sign for global economy and may create a lot of pain in the economy as well as on the geo-political front globally. The IMF mentioned that the escalation of US-China trade tension was one factor to have contributed to a "significantly weakened global expansion" late last year, as it cut its 2019 global growth forecast.

The recent market rally has been fuelled by foreign flows. Do you see retail flows into equities also pick up post the election outcome?

Investors are being cautious and waiting out at this point of time because of the ongoing elections. Post-election, investors will continue to build equity exposure as good quality stocks will grow no matter what the outcome will be. Domestic institutions (DII’s), including Mutual Funds, have been gradually infusing liquidity in the market due to increasing retail participation systematic investment plans (SIP) and Lumpsum investments.

I do not see retail participation in equity coming down immediately, as they need to see confidence and conviction before taking any decision of their investments and equity as an asset class. I feel they will take a more cautious approach before infusing heavily again into the equities.

How do you see the primary markets playing out over the next 12 - 18 months? Issues from which sectors, according to you, will find more takers?

Primary markets are always dependent on the buoyance of secondary market. I feel that activity in primary market only start happening after we see good activity in secondary market which, to my mind, will take at least a year or so. I expect domestic consumption would remain in flavour for primary market investment with special preference for consumer services companies.

A number of players are now entering the wealth management business. Is this segment now getting overcrowded? What are the margins? How does Anand Rathi maintain an edge?

The margins in wealth management business are also shrinking due to regulatory changes in commission structure as well as more number of players entering into this business. We at Anand Rathi are in wealth management business for more than 11 years. We strive to explore various innovative ideas and suggest our clients based on suitability of their requirements. We have been doing this successfully from past many years. As a result, we garnered tremendous trust from our clients. Our advices are uniquely designed for every single customer based on their needs and comfort.

Over the next couple of years, do you see more asset managers list at the bourses? What are your plans?

I do see more asset managers listing themselves at the capital market. We also have plans to go public and get ourselves listed in the coming future.

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