I am cautious on public sector banks now: Saibal Ghosh

Interview with chief investment officer at Aegon Life Insurance

Public sector banks have been in the limelight once again with the country’s second-largest public sector bank, Punjab National Bank unearthing fraudulent transactions. SAIBAL GHOSH, chief investment officer at Aegon Life Insurance in conversation with Puneet Wadhwa says he is remains cautious on the banking sector. Nifty earnings should grow at around 17% - 18% in FY19, he says. Edited excerpts:

Is the worst over for the markets?

The reason for the recent market correction is more global than local. The risks to the equity market is more from hardening of bond yields worldwide than any domestic disappointments. However, it seems that the US Federal Reserve (US Fed) is already through with large part of its initially targeted tightening if inflation in the US does not spike up on a sustainable basis. On the local front, all eyes are now on the earnings and monsoon. The earnings must keep up with market expectations to keep the market buoyant. 

What has been your investment strategy thus far in FY18? Do you see a need to alter this going ahead?

We have been fully invested. Directionally, I do not see any reason to change the strategy from here on, as we are at the cusp of a multi-year earning growth after almost four years of stagnated growth. However, the 14%-15% compounded annual growth rate (CAGR) returns that we have earned from the equity market in last three years or so have largely come from price-to-equity (P/E) expansion rather than earning growth. Further P/E expansion from the current level can be ruled out given the hardening of bond yields. Going forward, the returns from the equity market will be made from the earnings growth and not P/E expansion. So, the focus will now be on earnings and quality of such earnings.

Which sectors are you overweight and underweight on? Why? Any contrarian bets?

We are overweight on financials, industrials and information technology (IT) sectors. We do not have much contrarian bets in the portfolio as our mandate is largely diversified and conservative. However, I find some quality pharma names with sustainable business model interesting, as there has been quite a bit of P/E contraction in last few years. Select real estate stocks may also be a good bet at the current juncture.

Your estimates for corporate earnings in FY19?

Nifty earnings should grow at around 17%- 18% in financial year 2018 – 19 (FY19). But, let me also point out here that only a third of such earning growth will come from pure domestic cyclical recovery. A large part will come from non-performing asset (NPA) resolutions of banks, metals and Tata Motors. Therefore, the quality of such earning growth should be watched carefully. I think IT may surprise positively.

How should one play the public sector (PSU) banking space?

I will be careful with PSU banks. While capital infusion is a very positive step from the government, but it is already in the price. Market will now watch for gradual improvement in operational parameters of these banks. I will be cautious.

By when do you expect the capex cycle to pick up?

It is difficult to put a time frame. As I can understand, we still have negative output gap in the economy. However, in last five years there has been hardly any capital addition while demand has grown at 8% -9% level. I guess fresh capacity build up should start when utilisation level reaches to 80% to 85% level. We are seeing some early green shoots, but it is still difficult for me to put a time frame.

Is the time right for bottom fishing in the mid-and small-caps?

One has to be careful here as mid-and small-cap stocks also suffer when interest rates goes up as they are almost four times more leveraged than large-cap stocks. Their margins also get squeezed with metal and oil prices firming up as a pass-on for these companies is not easy. These stocks are expensive and quite an aggressive estimations have gone behind such pricing. Such stocks require specialised skill set to evaluate and manage. I would suggest that at the current level of the market the retail investors should leave it to the professional fund managers to manage their money in this space.