Focus to be back on fundamentals once poll season is over: Krishna Sanghavi

Expectations around the 2019 election outcome may influence sentiment and cause volatility, says Krishna Sanghavi, head (equity), Canara Robeco Mutual Fund. In an interview with Ashley Coutinho, he says the next six months may offer select buying opportunities in mid- and small-cap stocks that have corrected significantly over the past few months. Edited excerpts:

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

The macro-economic environment for India saw a sharp improvement in November, essentially led by the sharp drop in oil prices. Oil prices can have significant implications on current account deficit, fiscal deficit, the currency and interest rate movement, and hence from a top-down perspective, outlook for the Indian economy and markets have improved vis-a-vis what it was 2-3 months ago. However, we still see markets facing headwinds and risks over the next six months on account of uncertainty in multiple events. These include oil prices after the potential withdrawal of exemption by US on Iranian oil imports in May 2019, the expected monetary tightening by the US Fed, worries on liquidity at NBFCs, and the election outcome. We expect reasonable clarity to emerge on these variables in six months.

Do Indian equities look overvalued at this stage? Your view on mid- and small-caps...

The markets seems to be fairly valued, with Nifty trading at around 16-17 times FY20 earnings. Mid- and small-caps have seen significant correction in valuation in 2018 and the valuation gap between mid-caps and large caps has shrunk significantly. The broad correction in this segment has happened; the next six months are likely to offer select buying opportunities.

How do you see oil prices, bond yields and the US Fed policy action playing out?

While oil prices coming back to $60-65 per barrel is definitely good for India, it is too early to say that the worst is behind us. 

The US Federal Reserve has been on a path of raising rates as it seeks to return to normalised interest rates. The rate-hike scenario seems tightly balanced between strong economic data currently against worries about a likely slowdown in growth in 2019 and 2020.  

The Fed chair’s recent comment about rates being just below neutral perhaps reflect this tight balance between present data and that expected in the near future. 

What bearing will the general elections have on the market?

While the expectations around the outcome of general elections in 2019 may influence market sentiment and cause volatility over the next 5-6 months, the good news is the event is much closer than what it was some time ago, so the volatile period ahead will be now shorter than what it was, say 6-8 months ago. 

What is important to note is that once elections are over, we will be back to discussing more fundamental agenda such as economic growth, corporate earnings and its impact on markets.

Do you see a reversal in mutual fund flows in the coming months?

Indian investors and financial advisors have, over the years, changed their outlook towards equity assets in terms of the time horizon. The industry has started seeing increase in average holding periods as well as increase in SIP duration. 

SIPs have been averaging around Rs 75 billion per month in 2018. We think this trend is likely to sustain as these investors have seen the power of compounding that equities offer with longer investment horizon. 

Given the categorisation norms and total-return index (TRI), will generating alpha become difficult for fund managers?

Not really. While these norms have perhaps raised the bar in terms of the comparison vis a vis benchmark returns, we believe that given the growth opportunities that the Indian economy and listed corporates offer, fund managers will be able to generate alpha for the investors vis a vis the applicable benchmarks.

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

We have already seen strong top line growth in H1FY19, though the margins and profits have not grown at similar pace as commodity/energy prices have impacted margins. Going ahead, over the next 4-6 quarters, we expect the earnings growth to pick up as we see select sectors like corporate banks, IT, industrials to start gaining earning traction while large retail banks and consumer staples, select consumer discretionary companies maintain their steady growth path.

Your advice to investors at this point...

Equities as an asset class is an important part of the asset allocation for any investor as equity markets reward growth and help in wealth creation over a longer time. As we increase the investment horizon, the Investors should remain focussed on their target asset allocation to equities and use the volatile market conditions to increase their allocation to equity assets.