Broader market still playing catch-up, stay with largecaps and select midcaps

There is merit in investing more into largecaps, followed by midcaps, for higher portfolio returns, over longer investment horizons. This clearly lays down the space of preferences, Bhavesh Sanghvi, CEO, Emkay Wealth Management, said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpts:

Q: Do you think RBI should have done more in its policy meeting to push growth and investment in the Indian economy?

A: The 25-bps cut in the repo rate is a confirmation that the economy requires support. The GDP numbers and the IIP numbers do not provide any comfort on the state of the economy.

One of the revival measures is to make credit cheaper through rate action. This is the third time in succession that the RBI has cut rates.

I think the RBI has done the right thing in cutting the repo rate and in addition to that, the stance of the policy has been changed to “accommodative” from “neutral” maintained earlier.

We can expect a gradual action from the RBI after evaluating the impact of the actions already taken. Therefore, we need to wait and watch.

It is also pertinent to note that these monetary measures alone will not be enough at this juncture and fiscal measures also need to be introduced.

Fiscal measures assume importance because the fears of a global slowdown and the high unemployment rate are things that may need extraordinary measures.

Q) How safe are debt fund now amid rising concerns from IL&FS and DHFL fiasco?

A: All debt funds carry a price risk or interest rate risk, as well as credit risk. The credit risk aspect, now, is more prominent in discussions due to obvious factors. It is likely that the credit risk factors may aggravate over the next few months.

The essence of the matter is that while making debt investments, it is important to look at the credit risk that the portfolio carries as much as the duration of the portfolio.

I suggest that you may take the advice of a professional financial advisor while selecting investments for the portfolio. There is no reason to be overly risk-averse.

Q: Where do you see the market going from here on?

A: As long as the money flows into the index stocks, the indices will balloon further. It is a limited barometer of the markets and it alone should not be relied on entirely while making longer-term equity investment decisions.

When the broader market moves up, there is a reason to be happy. But, that can happen only if the economy registers higher rates of growth and the corporate earnings are growing as well.

On the macro front, to ease the situation, the RBI has already cut the repo rate and has shifted the stance to an accommodative. But, to relieve the stress in the system, the government too needs to initiate new steps and the budget on July 5, 2019, is eagerly awaited for fresh indications on the steps to rekindle rural incomes and employment.

The NBFC crisis may stay with us for some more time, probably for one more year, till wheat is separated from the chaff, and the regulatory framework for these entities is tightened.

Those entities who have too much of asset-liability mismatches will face more problems. We need to be careful about this sector as only the larger ones are likely to come out unscathed.

Q: Do you feel that the broader market could outperform, and if yes, then why?

A: One should not be too carried away by this noise. If you look at the last one-year performance of midcaps and smallcaps, it can be seen that returns were at negative 5 percent and negative 16 percent, respectively, against Nifty returns at 11 percent for the same period.

It is a known fact that even for longer time horizons, the smallcaps have not been able to beat the largecap returns. If you see the three-year returns, Nifty, mid and smallcaps gave 13.50 percent, 10.50 percent and 7.90 percent, respectively.

There is merit in investing more into largecaps, followed by midcaps, for higher portfolio returns, over longer investment horizons. This clearly lays down the space of preferences.

Q: What are the sectors that are likely to do well?

A: The sectors that are more likely to do well include banking, quality NBFCs, infra and cement. Consumption may be weak on performance. We like consumption as a long-term theme, given the high demographic dividend we enjoy.

Q: If an investor in the age bracket of 30-40 years plans to invest Rs 10 lakh in markets via MF route, what would be your advice in terms of portfolio allocations?

A: Given the age profile, and assuming that the risk profile is in line with the age profile, and the investment horizon is at least five years, we would suggest that the investor may look at equities for the entire amount that he plans to invest.

Investments may be made into largecaps, multicaps and midcaps in that order. 70 percent may be committed to largecaps and multicaps and the balance 30 percent may be allocated to mid-cap funds.

Q: The auto sector has been on the sell list of both MFs and FIIs. Do you think this sector could emerge as a dark horse in the next 12-24 months? 

A: The auto sector has been on the decline over the last few quarters. The last quarter was particularly weak on account of extremely weak volumes, increase in the cost of ownership of vehicles, purchase deferrals and issues on the financing of vehicles given the peculiar conditions faced by the financing companies.

The sector also faces a major challenge due to the increasing migration into electric vehicles over the next five to ten years. As prices move down and the valuations become attractive due to corrective downward movements, investors will come back into the sector.

Q: Do you think the momentum will continue in the Indian equity markets?

A: Yes, the indices are up and the momentum is something that became visible in the run because of the general elections and post-election, it seems to be continuing. It is needless to say that markets like stability and continuity in policies as uncertainties hamper the progress of the markets upwards.

But, at the same time, one should not overlook the fact that it is the indices that have moved up and the broader market is still playing the catch-up game. In fact, many companies outside the indices are trading closer to their 52- week lows. This makes a case for long term investment.

Q: How are we placed among emerging market peers?

A: The Indian market will retain its attractiveness based on one major factor, that is differential returns, which it is likely to generate, despite even a moderately depreciating currency.

The unprecedented growth in GDP and the consequent expansion in earnings across sectors will gradually translate into market capitalisation and overall performance in equity markets in the next few years.

The speed of reforms with change is likely to see new pinnacles. This is what is going to lead a market with a favourable demographic base.

Disclaimer: The views and investment tips expressed by investment expert on are his own and not that of the website or its management.

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