Don't expect too much volatility before election results: Gopal Agrawal, DSP Investment Managers
Next three months are likely to be a little volatile with an upward bias in oil market, says Agrawal.
How would you map the market risk reward ratio after the rally? It has been a solid comeback, 7-8% on the Nifty, 10-12% in small and midcap stocks. Do you think that oversold position which we were in is behind us?
Yes from a fundamental perspective, definitely the valuations have caught up and in the near-term, India is benefitting from huge emerging market inflows. We have seen around $3.5 billion of inflow in Indian market and there are some positives. Globally, central bankers have turned very dovish and RBI is hell-bent on improving domestic liquidity and cutting interest rate to boost growth. Thanks to supportive central bankers -- both in India and abroad -- liquidity inflows and reasonable valuations have led to this rally.
There is a fear that the much talked-about volatility in the run-up to the elections is going to kick back or do you think those days are behind us?
There can be some volatility but the way political events have been played out, my sense is heightened volatility may not be there. As long as the market runs up, we have to be ready for some volatility, but I would say with confidence that heightened volatility may not be there in the run up to May 23rd.
Crude oil prices have significantly cooled off. What is the stance that you have on the oil and gas space?
Currently, for the next three-four months, oil prices may move up because Saudi has announced 0.4 million barrels of production cut and the new pipeline in US is not likely to come before June-July. So next three months are likely to be a little volatile with an upward bias in oil market. But the medium-term view on oil is really benign.
In the near term, we can see some pressure because of rising oil price but this will be temporary in my view. Any correction may happen because of this and as we are entering into elections, generally there are some issues related to retail price variation and any correction can be viewed for medium to long-term portfolio construction. On balance, oil price in medium term view is very benign. We are constructive on oil and gas space also.
Would you approach election as a high-risk event and take a very defensive stance which is hide into consumers and IT? Do you have a special strategy in place?
I will approach this event with more domestic-oriented sectors because I am positive that construction activity has picked up. We are seeing some early signs of investment cycle picking up, thanks to the IBC process resolution and in certain categories, we are seeing capacity utilisation inching upward. Add to this, RBI is very much concerned about slow growth. So, they are adding liquidity in the system and are also likely to cut rate in the next policy and then maybe go for one more rate cut. On balance, I am more constructive and positive on the market and buy more domestic cyclicals and investment-related stocks.
There is reason to get optimistic on cyclicals and to believe that demand will be generated. But how will demand get generated because entrepreneurs are not taking risk?
We should not write off the consumer businesses because what we are seeing for the last five-six years is very benign agri commodity and input prices and in India, structurally the consumer demand is very strong. They have the tailwind of higher consumption demand and benign commodity prices. Both have led to consistent earnings upgrades in the consumer staples and discretionaries, which I am still positive on.
The limited point I am making is there is no reason to become very defensive because till February, the stocks got hammered. Now valuations are attractive and many things which I said about EM flows and RBI’s injection of liquidity and also some upgrade in capacity utilisation, we are seeing across the board, which is really positive.
In the power sector, for the first time many state governments are coming for long-term power purchase agreements, which means they are also seeing that demand is rising. Out of 25,000 megawatt of redundant capacity, now 8,000-9,000 MW has been bid for. In cement sector, we are seeing 15% plus volume growth, which is also very positive. We have to broadbase the portfolio rather than going defensive.
Your largest holdings are the likes of a Bajaj Finance, ICICI Bank, HDFC Bank. Have you deviated from this core list anywhere and gone for mid or smallcaps?
The funds which I run are primarily largecap biased funds and definitely I do not venture much into smallcaps. I have added one or two midcaps only, but primarily I stick to largecaps which is the mandate of my fund.
Within what pockets are those midcaps that you have added?
I have added something in construction and something in cement and oil and gas.
The real estate sector has fallen into a deep whole and it will not come out easily. Despite the new GST rates, if the real estate sector does not pick up what is the scope for cement to do well?
Two things which have worked very well for cement are: a) NHAI related demand is really rocking and we are seeing some activity on affordable housing side. b)We have seen some subsiding pressure on the input cost side. A combination of these two will lead to delta positive earnings momentum and till mid February, the stock has corrected very meaningfully. If you have a positive earnings momentum and also valuation is reasonable, that is a point to add and we have seen in the recent last 10-15 days a very good price hike across the board, primarily in southern India.
That really gives me the positive optimism on the cement side considering the valuation. There is pressure on the high-end real estate market and that has to be fixed. Some positive comes from the that RBI is cutting the interest rate trying to inject liquidity in the system to make it more neutral to positive. If both the things played out, my sense is some positivity will come and I want to add that new launches have come down dramatically in many markets.
If there is demand, you will see that inventory clearance will come very fast and there will be some uptick in lease rental across the board. That is also incremental positive. I would not be saying that everything is very gung-ho or rosy but we are really coming out of the woods.
What political scenario are you pricing in post election? a) The current administration comes back into power; b) The current administration comes back into power with outside support; and c) There is a change of administration.
I am not an expert on politics but as an investor we want political stability and market would love any administration that provides stability. Second, India has huge potential for volume uptick because of our young population. If we get a little stability which the market is actually looking at after the recent events which have played out in India and some of the exit polls are giving some positive feelers -- we will have strong volume growth across the board.