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Stick to largecaps and have at least a 3-year view: Gautam Sinha Roy, Motilal Oswal AMC

Updated: Aug 01, 2018, 10.20 AM IST
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  • The US generic pharma market will come into favour in the course of the year.
  • Retail financials, including NBFCs, continues to be stable.
  • We are also bullish on rural consumption.
Two beaten-down sectors — IT and pharma — are now coming back in favour, says Gautam Sinha Roy, fund manager, Motilal Oswal Asset Management. In an interview with Prashant Mahesh, Roy says that over the next one year, one should expect flattish or single-digit returns, while for three years, one should expect 13-14% returns.

Edited excerpts:

The Nifty and the Sensex are trading around their life-time highs? What are you thoughts on valuations?

The Nifty 50 is trading at a 12-month trailing PE of 22x, while the Nifty 500 is trading at a PE of 25x higher than its long-term averages. Midcaps have corrected from a PE of 50 in January to about 40 now, and are still more expensive than large caps. These high valuations have been supported by domestic liquidity and hence valuations have held up at these high levels. From a macro perspective, when this government started in 2014, we entered a very good cycle with both crude and inflation at lower levels. However, the macros now have turned negative, with inflation touching 5% in June. PEs cannot remain elevated for long time. In the near term, liquidity impacts PE ratios. Domestic liquidity has been favourable and this typically channelises itself into mid and small caps, which lead to higher valuations, which is now coming off.

What returns should investors expect and how should they position their portfolios?

Investors should have a large-cap bias in their portfolios, should tread cautiously and have a three-year view. The market has been bipolar and is punishing stocks with negative news drastically or rewarding them when earnings surprise them. For example, a commercial vehicle manufacturer lost one third of its market capitalisation on the new tonnage norms. Hence, investors should tread cautiously, and in the next one year, one should expect flattish or single-digit returns. For a three-year period, they could expect 13-15%.

Which sectors are you bullish on?

Two major sectors, which were beaten down, are now coming back in favour: IT and pharma. The rupee depreciation has been beneficial for technology companies. The IT sector has seen revival, and its top two companies are growing by 30-40% in the digital space, which has led to the overall growth improving. This helps you find more stocks in the IT space now than a year back, and that has been the biggest change in markets this year. The US generic pharma market will come into favour in the course of the year. That would be contingent on the fundamental challenges in the US generics business which was dependent on pricing and competition. We are close to bottom there and things will start improving in pharma. Retail financials, including NBFCs, continues to be stable. But there are worries about yields going up, which affects the cost of funds for a low-spread business like housing finance.

We are also bullish on rural consumption. Monsoon by and large is looking good. The government has given MSP hikes which helps rural income. There is a natural tendency of the government to focus their budget on rural parts of economy. So far, it was focused on productivity enhancement measures through crop insurance, irrigation and health insurance. Growth is also coming back in sectors like agricare and FMCG.

What should investors avoid?

This is not a market to avoid sectors. Other than pure thermal power, I cannot think of any sector which is in doldrums. There is broad-based recovery in the economy, but good companies with growth are priced in. So, avoid companies where there is no value left on the table. Due to NPA issues not getting resolved or operational issues, PSU and corporate banks have still some pain left. Also, PSU banks have a lot of exposure to thermal power. Two key areas where portfolios have taken a beating are oil marketing companies and airline companies. From a long-term perspective, these are very good companies. But in the near term, they can cause a lot of pain. If oil goes above $80, the capacity of the system to absorb these prices has not been tested for a long time and is suspect. Earnings growth will not be strong in these companies, and rising crude prices could hurt further.

What is your biggest worry over the next one year?

Election is my big worry. They create some kind of uncertainty, though over the long term, it evens out. It creates a lot of uncertainty in the minds of foreign institutional investors who own 20% of the market. Political uncertainty affects liquidity. The big worry is of liquidity drying up. A billion dollar plus SIP book has been built, which is a great support. This cycle we are supported by domestic liquidity, which is untested. How investors will react when they see negative returns is not known.

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