'Investors may get an opportunity to buy banks, NBFCs at lower levels'

Markets are trying to find their feet after a sharp fall. Saravana Kumar, chief investment officer at LIC Mutual Fund tells Puneet Wadhwa that investors should focus on large-cap schemes in these uncertain times. Markets, he says, will be watching what the outcome of the upcoming state polls have on economic reforms and pre-general election alliances. Edited excerpts:

What is your market outlook for the next few quarters? 

In the last two months, the global headwinds were significant and are likely to persist for some more time. This could make correction period a bit longer. US equity market correction and a rise in US treasury, bond yield had made the emerging market (EM) equity less favourable. Back home, rise in crude oil prices, depreciation in the rupee, credit default of IL&FS and its group companies, possible asset-liability (ALM) mismatch in non-bank finance companies (NBFC), outcome of five state elections in 2018 and outcome of general elections in 2019 are some of the factors that will keep the sentiment in check.

Should one use the correction to buy bank / NBFC stocks?

We expect the growth rates for NBFCs to slow going forward. Due to cash flow challenges, high leverage NBFC may face further challenges in growth and profitability. Given this, it is likely that NBFC space may see headwinds for some more time. Investors may get an opportunity to buy banks and NBFCs at lower levels.

Your overweight and underweight sectors? 

Export-oriented sectors like pharmaceuticals, information technology (IT), agrochemicals, select auto OEMs (original equipment manufacturers) and auto ancillaries, FMCG (fast moving consumer goods) would do well. Private Banks that have good CASA (current account & savings account) deposits and better risk management practices are also likely to perform. 

What are your cash levels?

We have been holding some percentage of cash and this was more in response to upcoming five state elections that have created some uncertainty. We are now deploying cash based on stock valuations and growth potential.

How do you see the mid-and small-cap segments fare in comparison to their large-cap peers over the next one year? 

During volatile times, retail investors should focus on investing in large-cap equity schemes. In a bear phase, the large-cap index would outperform small-and mid-cap indices. Even from a risk-adjusted return viewpoint, the large-caps would give better return as well as liquidity.

Are you facing any redemption pressures in any of your schemes? 

No. We are not facing any redemption pressure. Rather, we are getting inflows into our large-cap, and mid-cap schemes. Since India’s per capita savings rate mainly in the financial assets is growing and likely to grow more going forward, mutual funds would attract good equity inflow in schemes through lump-sum as well as systematic investment plans (SIP).

Your view on corporate earnings growth for FY19 and FY20?

The combined net sales of companies in the Nifty50 index are likely to grow 26 per cent year-on-year. This is likely to come from strong growth in consumer, information technology (IT), upstream oil & gas and select retail-oriented banks. Two-wheeler companies are likely to drive earnings growth of the sector for the September 2018 quarter due to sustained volume growth despite many disruptions. A sharp rupee depreciation in calendar year 2018 (CY18) and momentum in IT projects on the digital platform will be the key growth driver for the IT sector in the September 2018 quarter.  

How much importance are the markets giving to the upcoming state polls?

Five state elections are being viewed as a run-up to the Lok Sabha elections slated in May 2019. Political Pundits believe that these state elections will test the popularity of government and its policies amid rising crude prices that might lead to inflation, turmoil in banking and finance sectors, and depreciation of the rupee, etc. Markets will be watching what these elections have on economic reforms, possible pre-2019 alliance with regional parties etc.