Mutual Funds

‘Small-caps are looking interesting after steep corrections’

Radhika Merwin | Updated on February 17, 2019 Published on February 17, 2019

Value stocks will catch up with others after the elections, says Tata Asset Management CIO


Until the cloud over elections lifts, markets will remain sideways. But from a two-year perspective, investors can bet on value and small-cap funds that offer a good opportunity, says Rahul Singh, Chief Investment Officer - Equities, Tata Asset Management. Excerpts from an interview with BusinessLine:

What is your outlook on our markets, given the uncertainty over elections? With global growth slowing, do you think flows will come back into Indian markets?

On valuations, Nifty is trading at about 18 times price to earnings at FY20 earnings, which is at a 15 per cent premium to the 10-year historical levels. The good part, though, is that earnings are recovering visibly and earnings in FY20 can see a 20-25 per cent growth.

That said, since valuations are already factoring in this kind of growth, returns for investors may be in high single or low double digits.

We are the only emerging market trading at a premium to historical levels and hence, that will limit FPIs (foreign portfolio investors) pumping money aggressively into India, even if the US dollar weakens and US growth slows down, which is the general expectation. India will get lesser share of the FPI flows.

So, we expect a very sideways movement in the market, at least in the first half (of the year), after which there could be some movement if the cloud over election lifts.

Which themes/sectors do you like at this point in time?

From a sectoral point of view, we are betting on sectors that will drive the earnings recovery. Corporate banks are seeing some of their issues getting resolved.

Also, with NBFCs (non-banking financial companies) and HFCs (housing finance companies) running into trouble, banks are seeing better pricing power, which is aiding their operational performance.

The flow of funds back into the banking system, given investors’ anxiety in debt mutual funds, is also a key positive for banks. The other sector we like is capital goods, as capacity utilisation appears to be inching up. While still early days, a fairly stable government should sustain this trend. Major policy changes left to be done in the country are not much, and we are only tinkering at the margin.

The IT sector which did very well last year, is unlikely to have another ‘rock star’ year. It is a good defensive play at best.

Consumption is the trickiest space as valuations have hit through the roof.

We will bet on it for another 3-4 months till the election uncertainty is done with, as these companies may continue to do well given the Budget push, etc. But it may be just a matter of time till cyclicals catch up and consumption takes a back seat.

What is your view on the ongoing turmoil in NBFCs?

The entire space can be divided into various sub-segments. HFCs are one, where there are concerns because of developer (loan) book and asset-liability mismatches (ALM). The other segment is CV financiers, where ALMs are lower, and they have sound parentage.

Then there are consumer-financing NBFCs, where ALMs are not a concern as the average tenure of the loan book is 1-2 years. Valuations in the CV financier space is looking reasonable now.

As growth recovers, these companies should do well; so, some of these NBFCs are looking interesting, both from a valuation as well as a risk-reward perspective.

For investors, diversified equity funds have failed to deliver in the last one year — many underperforming their benchmarks. Which type of funds should they bet on now?

Value funds are a good bet in this market from a two-year perspective. This is because value stocks are due for a catch up. But this may happen only after elections, as investors prefer safety right now.

So, while ironically stocks with high valuations are riskier, investors can stick with high-valued stocks for a while. But for investors with a medium-term perspective, value funds are a good choice.

Small-caps, too, are looking interesting right now, after their steep corrections. Also, the universe of small-caps has widened after SEBI’s change in categorisation norms. Stocks below ₹Rs 9,000 crore in market cap fall under the small-cap category, which is a wide base.

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