We expect high single-digit returns from the market this year: Mihir Vora

Max Life Insurance director and chief investment officer Mihir Vora says that for FY19, he expects an earnings growth of 15% - 18% in an interview with Business Standard

The March 2018 quarter (Q4FY18) earnings season has begun well with the information technology (IT) companies delivering healthy numbers. MIHIR VORA, director and chief investment officer, Max Life Insurance tells Puneet Wadhwa that for financial year 2018 – 19 (FY19), he expects  an earnings growth of 15 – 18 per cent, predicated on a recovery in earnings for corporate banks and commodity prices remaining strong. Edited excerpts:

What has been your investment strategy over the past few months? 

We have broadly maintained our investment strategy. We see consumption (auto, fast moving consumer goods etc.), private sector financials (banks, NBFCs) and government expenditure as key drivers of growth this year. We’ve been increasing exposure to information technology (IT), as the US economy seems to be doing better-than-expected and corporate spend on investments and IT is picking up. We remain stock-specific in approach as overall valuations are elevated. 

How do you see the markets playing out over the next 12 months?

There will be bouts of volatility due to global and local factors. On one hand, the economy is expected to recover from the drag caused by the implementation of goods and services tax (GST), demonetisation, government spending and rural prosperity – giving an impetus to growth. On the other, valuations are a bit stretched as market have moved up a lot in the past five years without significant earnings growth. 

Private investments and real estate is still sluggish. Thus, the onus of growth is on the services segment. Election in key States and the General Election in 2019 may mean that the Government may tilt towards profligacy in expenditure. While this may be good for consumption, inflation and interest rates may go up if fiscal prudence is relaxed. 

We expect high single-digit returns from the market this year, in the base case. Upside or downside will be a function of growth – the economy needs to deliver the expected 7.5 per cent growth for the markets to deliver better than single-digit returns. Any disappointment in growth can see the markets correcting downwards. 

What are your cash levels now, as compared to a year ago?

We are marginally higher in cash levels compared to benchmarks. We have been adding stocks depending on opportunities presenting themselves in individual stocks. The themes of consumption and government spending continue to be core to our approach. The other emerging trend is the pick-up of growth in the global economy, especially the US and to a lesser extent, Europe – this has implications on global commodity prices, IT services and exports. 

What are your current overweights and underweights?

Our current overweights are in Consumer Discretionary (Automobiles), Consumer Staples (FMCG), Industrials (construction, defence manufacturing), Energy (refining, marketing), Private Sector Financials, Metals. We are underweight on telecom, utilities and public sector banks (PSBs). Over the past year, we have reduced exposure to mid and small-caps in our portfolios due to expensive valuations. 

Your expectations from the Q4FY18 earnings season? What are your estimates for FY19?

For January – March 2018 quarter (4QFY18), the net income growth is likely to be in single digits, implying a full year earnings growth of around 6 per cent for FY18. Margins (ex-banks, oil-marketing companies) are likely to remain steady. The key monitorables will be the trajectory of earnings downgrades in corporate-focused banks and upgrades in automobiles and technology. 

For FY19, we estimate an earnings growth of 15-18 per cent, predicated on a recovery in earnings for corporate banks and commodity prices remaining strong. Besides banks, which constitute 50 per cent of the growth in earnings, metals and automobile segments are the major contributors. Therefore in case the global recovery slips due to trade wars or some other risk, earnings in these sectors could be at risk. 

What’s your view on flows to the equity market?

The pace of growth for FY19 will continue to be robust, though a bit less than what we saw in FY18. FY18 had the impact of demonetisation where the banking system saw massive inflows and some of the inflows found their way into financial assets like mutual funds, insurance, deposits etc. That was a one-time event and has created a high base. Since that is unlikely to be repeated, the growth rates will taper off from the 25-30 per cent rates seen in the past year. Still, the growth should continue to be a very healthy 15-20 per cent as the trend towards financial assets continues. Real Estate and Gold sill look uninteresting from a medium-term perspective, which supports the case for the move to financial assets.

To what extent are the markets discounting Bharatiya Janata Party (BJP’s) possibility of a loss in the upcoming assembly elections in Karnataka? 

The situation appears to be a close contest between the incumbent and the challenger. The outcome of the elections may create volatility in the short-term. However, it may not necessarily be construed as a precursor for the 2019 country-wide elections. Once the dust settles after Karnataka, markets will start looking beyond towards 2019, fundamentals and economic growth. 

What about monsoon & inflation forecasts?

Both agencies (IMD and Skymet) in their advance forecasts have suggested a normal monsoon. Note that in the past decade at least one agency called for a deficient monsoon when monsoons have been deficient. Our default position is that the monsoons are likely to be normal. Inflation is likely to be around 4.5-4.75 per cent for FY19.

How are you viewing the developing geopolitical situation and oil prices in context of their impact on global financial markets? What about India?

Rising oil prices are a risk for Indian growth and inflation. However, the current prices may not be sustainable for a long time since they have been possible only by aggressive OPEC production cuts, led by Saudi Arabia. This is in the build-up to a potential IPO of Saudi Arabia’s largest oil company. 

However, the futures markets ahead point to prices which are $5-7 lower one year ahead. Shale becomes quite profitable at these prices and the capacity build-up by alternate energy sources continues. In the next few months, this may continue to be a concern for India and is one of the reasons for currency weakness.