Expect to see wider participation of stocks this yr: Tata MF's Rahul Singh

'Investors should focus on building their portfolio in a disciplined way', says Rahul Singh

A fractured election mandate remains the key risk for markets, says Rahul Singh, chief investment officer (equities) at Tata Mutual Fund. In an interview with Ashley Coutinho, he says flows could be impacted in the near term even though the earnings forecast will hold its upward trajectory. Edited excerpts:

What is your outlook for the market in the year ahead? 

A fractured election mandate would be the key risk but the probability has reduced over the last couple of months. Moreover, it should be noted that earnings drivers for next year – corporate banks, consumption and private capex – are somewhat independent of election results and hence the impact on fundamentals would be less severe. There could, however, be impact on flows in the near term, which could impact market valuation even though the earnings forecasts will by and large hold its upward trajectory. 

Do markets look overvalued?

Indian markets are trading at forward price to earnings ratio of 18x, which is at a slight premium to its history as well as other emerging markets. However, these premiums are also a function of the forecasted earnings recovery driven by a few sectors. In addition, barring a completely fractured election mandate, there is likely to be greater policy continuity in India versus the rest of the markets which are being impacted by global uncertainties like coordinated global slowdown, US-China trade war and Brexit. Our earnings growth and markets are relatively immune to the global macro factors which can justify the valuation premium. 

In such a scenario, although headline indices may give moderate returns, we expect the market to become much broader this year with greater participation from the cyclical and value segments as well. So, while 2018 was a difficult year for funds given the narrow set of stocks that did well, this year is likely to witness wider participation and hence greater opportunities for funds to outperform.

FPIs had been pulling out money from India while MFs remained net buyers. The trend has sort of reversed in March.

Our premium valuation over EMs is back to around 50 per cent which is around the average levels although it went to 65-70 per cent during 2018. That phase of overvaluation, which we saw in 2018, is behind and considering the current premium to EMs, provided we have a reasonably positive election outcome, the FII interest should sustain if not increase.  

Do you see a sustained recovery in corporate earnings in the coming quarters? 

Earnings growth next year could even exceed 20-25 per cent but is slightly optical as it’s driven by sharp recovery in bad loans in corporate banks and couple of other sectors/companies. The core earnings growth will revert to 12-15 per cent in FY21. We would back the sectors which will lead this earnings recovery in FY20, corporate lenders being one example.

Which sectors are you bearish and bullish on? 

We like corporate lenders, even though it’s a consensus view now. We believe that the valuation support is still there. Certain pockets of capital goods are demonstrating green shoots and reflecting in the order books partially driven by automation/brownfield capex in the private sector. Post-elections, the public infra capex (which had slowed down in FY19) will get a fresh lift, too. Declining global yields also means that the annuity businesses like utilities and commercial real estate could get re-rated. 

What is your advice to investors at this point in time? 

Investors should focus on building their portfolio in a disciplined way and focus on segments of the market which are likely to do well this year; that is, the value category and some of the cyclical sectors. Small cap, as a category, is also attractive from a longer term perspective and offers greater choices to a fund manager to build a bottom-up portfolio of stocks at a relatively reasonable valuation.