Money Control, Nov 14, 2019
The Sensex is at lifetime highs but the Midcap index is more than 20 percent away from its highs. investors should not put in lump-sum amounts into the market and build positions gradually, says Sunil Sharma of Sanctum Wealth Management.
With fixed deposit rates coming down drastically in the last one year, investors can look at small-saving schemes. Debt mutual funds, with maturities up to three years, are a good option too, Sunil Sharma, Chief Investment Officer, Sanctum Wealth Management, says in an interview to Moneycontrol’s Kshitij Anand.
Edited excerpts
Q) Do you think the government’s bailout package for the real estate sector is enough or will it have to put in more money to move the needle? Which are the stocks that are likely to benefit from the package?
A) India’s plan to set up a Rs 25,000-crore fund to salvage stalled residential projects will only be sufficient to complete about 6 percent of the constructions that are running behind schedule. As per Anarock Property Consultants, the amount of projects stuck for lack of funds in the country is close to $63 billion (Rs 4,60,000 core). So, the real estate fund will cover 6 percent of the requirement.
Although the fund size is not significant, it will be a kickstart and help the sentiment to recover. With LIC and SBI contributing 60 percent of the funds, the fund size can be expected to increase given the deep pockets of these institutions.
The whole environment has turned negative for the real estate sector post demonetisation and the NBFC crisis has worsened the situation in the last year.
Issues with smaller players in the real estate could work favourably for large organised players. A series of reforms/events starting with demonetisation, implementation of RERA, introduction, and rationalisation of GST as well as more recently the NBFC crisis have worked favourably for organized real estate developers and will likely drive out marginalised players in the market.
Q) The Indian market, which touched fresh record highs just last week, is now trading near crucial support levels. Profit-taking at higher levels and a weak macro data have weighed on sentiments. What is the way ahead?
A) The market tends to spend a fair degree of time making new highs. The relevant question is whether valuations and earnings support further upside.
We think the answer is yes. Earnings are likely to pick up as the economy stabilises and the rate cuts of earlier this year start kicking in.
We note that broader markets (Nifty Midcap 100) are more than 20 percent away from the highs made in January 2018. Investors should invest with a longer time horizon and over the long term, equities have delivered attractive returns in the past decade.
Secondly, investors should not put in lump-sum amounts into the market and build positions gradually.
Q How has India Inc performed in the September quarter? Any bright spots?
A) Companies have delivered robust results in the ongoing earnings season, primarily on the back of the cut in corporate tax rates. The top line has been muted across sectors on account of a demand slowdown. However, the operating profits have seen decent growth due to an increase in margins led by a fall in input costs.
Financials, especially private sector banks, have reported a strong set of numbers as they benefited the most from the reduction in corporate tax.
Consumer staples saw good operating margins expansion, and we continue to stay focused on financials, consumer staples and to a certain extent industrial. These remain the bright spots and are likely to continue their earnings delivery.
Q) Largecaps are leading the Sensex and the Nifty rally, while the broader markets have remained under pressure. Can we say that the big wealth will be created in quality small and midcaps if someone is looking at a horizon of two-three years?
A) In an initial phase, largecap quality names do better, as we are witnessing currently. As the rally gets broad-based, mid and smallcap names generally catch up with their larger peers.
The sustenance of the rally in the mid and smallcap names will primarily rely on the economic recovery as these stocks are very highly correlated with the domestic economy.
Investors will do best to consider a diversified portfolio that includes roughly two-thirds large and one-third mid and small caps.
Q) With fixed deposit (FD) rates going dry, what are the other secure avenues of investments?
A) With FD rates coming down drastically in the last one year, investors can look at small-saving schemes, as the difference is more than 1 percent points across maturities.
Also, debt mutual funds with maturities up to three years can be considered, as we expect the RBI rate-cut cycle to continue, which will help in some capital gains apart from the interest accrual.
Q) Do you think realty and autos can be the dark horse for the year 2020?
A) We believe that real estate companies with good reputations across the country for project delivery will benefit from consolidation in the sector. Small players will find it difficult to sustain, given the ongoing liquidity challenges.
For auto companies, it is too early to call out the bottoming on the back of good sales in the festive season. November and December sales will need to show improvement for a more visible recovery. Also, how the companies plan their inventories with respect to transition to BS-VI models will be the added overhang. So, yes on real estate and not yet on autos.
Q) Is the worst behind us in terms of domestic macros and earnings?
A) We think so. With respect to domestic macros, the data continues to paint a negative picture. PMI, IIP, core sector data, credit growth all continue to be weak.
However, looking ahead we believe the economy is stabilising and on a path to a gradually improving economy. On the earnings front, companies have delivered a strong bottom line due to the reduction in corporate tax rates.
On the top line, weakness continues on account of a demand slowdown. Markets tend to act ahead of the economy and are indicating also that the worst is behind us, in particular for largecaps.
Q) Sectors that are likely to lead the next bull run: insurance, AMC business or zero-debt companies such as IRCTC?
A) Insurance, AMC businesses look interesting. They will continue to deliver strong numbers due to low penetration and an increase in financial savings. The market size is humungous for them.
They will continue to create wealth for shareholders. Zero-debt companies that are consumer-facing and have a monopoly like IRCTC should trade at a higher valuation on account of the cash flows they generate. The leaders are likely to come from these sectors.
Q) What should be investors’ strategy for mutual funds? While the Sensex has hit record highs in November, most of the portfolios are still running into losses.
A) Although the Sensex is at lifetime highs, the Midcap index is more than 20 percent away from its highs. With respect to mutual-fund schemes, underperformance versus benchmark indices has reduced over the last six months, as the rally is getting broad-based.
The second rung of companies is witnessing investor interest. In the coming year, there should be good alpha generation by most of the schemes focusing on the broader market.
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