'Earnings need to catch up for the markets to sustain at current levels'

There is value in select mid-cap stocks, which cannot be ignored, says chief investment strategist at Standard Chartered Securities.

Backed by liquidity from foreign flows, benchmark indices have scaled new highs over the past few sessions. Mitesh Dalal, director, and chief investment strategist, Standard Chartered Securities tells Puneet Wadhwa that election results, crude oil prices and the overall global economic slowdown are some of the other factors besides earnings recovery that investors need to keep a tab on. Edited excerpts:

What’s your market outlook for the rest of 2019?

Market sentiment changed post the announcement of the election dates. Foreign portfolio investors (FPIs) are buying aggressively. On the other hand, the domestic institutions (DIIs) have turned sellers after a long time. The market rally is in anticipation of a favourable outcome of general elections, favourable US-China trade agreement, the dovish stance by the US Federal Reserve (US Fed) and geopolitical tensions with the neighbouring country now on the back foot. 

Going ahead, the market direction will be decided by the fourth quarter earnings for the financial year 2018 – 19 (Q4FY19) and the outcome of general elections. While both these will have an impact on the markets, an unfavourable election outcome could lead to higher volatility that may not last long. We are bullish on the market from a long-term perspective.

How long do you think the foreign investors will continue to pour in money into Indian equities?

Earnings will have to catch up for the markets to sustain at the current levels. Q4FY19 results will tell us more about the earnings cycle, which in turn, will determine the flows. Also, we have to be mindful of election results, crude oil prices and the overall global economic slowdown that may have its impact on the flows and markets.

What has been your investing strategy thus far in calendar year 2019 (CY19)?

We have been suggesting our long-term clients take the benefit of the volatility and invest in a staggered manner. We have been overweight on private banks, insurance in the financial space and digital services segment in information technology (IT) sector; neutral on public sector banks (PSBs) and consumer discretionary; and underweight on oil and gas, utility sectors.

How comfortable are you with the overall market valuation?

The Nifty50 is trading a historical price-to-earnings (P/E) of around 28 times and forward P/E of around 18 times one-year forward. In the current environment, we believe volatility will be high and would prefer a bottom-up approach rather than looking at the market as a whole. The mid-cap and small-cap indices have been beaten down from their peak and there is value in select mid-cap stocks, which cannot be ignored.

Have the banking stocks run ahead of the fundamentals?

We have been ‘overweight’ on private banks for quite some time now and have gone ‘neutral’ on PSU banks in January 2019. PSU banks selectively can do better since the government has infused funds and some banks have come out of the prompt corrective action (PCA). As far as valuations are concerned, a lot of money is chasing the few names in this sector that have shown resilience in bad times and delivered earnings. Hence, funds are flowing towards these names.

What’s your advice to investors given the developments?

Long-term investors in the equity segment can benefit from the volatility, while the short-term investors can play the momentum and exit at appropriate levels. The clarity, we believe, will come post-election results. Prior to that, earnings will guide the markets. We also have to be watchful about the monsoon, as the El Nino ghost is hovering around; though it is too early to confirm anything.