Equity returns to be muted in 2018 versus last year: Exide Life Insurance

Exposure to midcap stocks should ideally be through the dedicated midcap fund route from the ULIP space.

The Indian stock market has been volatile of late. The benchmark indices have shed all their 2017 gains in the current calendar year. As we head into another result season, the long-term view remains positive. However, gains during the current year may be muted compared to the previous year, Shyamsundar Bhat, Chief Investment Officer of Exide Life Insurance, told Moneycontrol in an interview.

Edited excerpts:

The possibility of long-term trade wars between the US, China and other developed nations has spooked sentiment worldwide. How does it impact Indian companies?

Potential trade-wars, particularly between the US and China, indicated by announcements from both countries, have added to global market volatility over the past few weeks. While the US proposes to impose tariffs on imported steel, aluminium, etc, China proposes to impose tariffs on agricultural and specific food products; aircraft; vehicles; etc. Since most of the job losses in manufacturing have been due to growth in productivity and automation rather than trade, trade-protectionism is unlikely to help in job creation. There might not be as much of a reduction in US trade deficit in goods as imports from other countries might increase due to either lack of, or expensive, manufacturing capacity in the US. It could also result in an increase in inflation in both countries. US companies have invested significantly in China in manufacturing and supply-chain, and moving these out of China would be very expensive.

Considering all the above, it is likely that we might eventually see trade negotiations and concessions. These negotiations, though, could be long-drawn and extend beyond the next couple of months. However, this does appear to be the most likely scenario. In other words, a full-blown trade war is not expected. As far as India’s trade with US is concerned, India’s exports of steel and aluminium to the US would be adversely impacted with the new tariffs. Also, India’s export incentives for sectors which have already become export-competitive as per WTO’s definition, such as textiles and gems & jewellery, would be a subject of negotiation. So, there could be some impact on Indian companies to this limited extent.

Post the correction in the prices of banking sector stocks, are there buying opportunities for equity investors?

Most corporate-lending oriented banks and public sector banks are expected to post disappointing results for the March quarter. Among PSU banks, only a handful might end up posting net profits for the quarter. Most retail-lending oriented banks are likely to continue to post positive results. However, to a large extent, both the above expectations have been factored into the relative underperformance or outperformance in these categories, respectively. There could be buying opportunities in other stocks within the financial sector, such as selective NBFCs which have corrected significantly due to the slight increase in borrowing costs, where there appears to be valuation upsides, based on the potential profit growth and asset quality, relative to the others mentioned above.

After seeing negative returns in the last quarter of FY18, what should be the realistic expectations of Indian equity investors? Will earnings come back to support investors’ expectations?

The past three-to-four years have witnessed a steady structural shift of savings from physical assets such as real-estate and gold into financial assets. The prevailing positive real interest rates should enable this trend to continue. Within financial assets, the allocation towards equities has been increasing due to the relatively higher return as well as low base, given the retail investor has traditionally been under-invested in equities. While long-term returns are likely to be in double-digits from current levels, and therefore better than most other asset-classes, Indian equity investors would need to moderate their expectations in terms of returns as compared with those witnessed in the past couple of years.

The onset of earnings growth has been repeatedly pushed forward over the past couple of years due to various factors such as softer global demand, demonetisation, GST, etc. We are starting to witness earnings growth from the October-December 2017 quarter, and we do expect it to be strong over the next two years. If inflows into domestic funds slow, and FIIs continue to be either sellers or small buyers, we expect this earnings growth to support the market.

Small and midcap stocks have seen price-erosion in the range of 25% and 40% in the last month. What should be the better way to invest in this space?

The broad market has seen a significant erosion relative to the Nifty or Sensex, and there definitely appear to be a reasonable number of quality midcaps now available at valuations which could offer significant upsides over the longer-term. But for investors, the exposure to midcap stocks should ideally be through the dedicated midcap fund route from the ULIP space. Investments in individual stocks would entail a deeper understanding pf the respective company’s strategy and management. Once invested, an exit decision is equally important as there could be changes in the external/internal environment in such companies which could alter the growth path dramatically. Monitoring of the same is difficult (though not impossible!) for retail investors.

As far as smallcap stocks are concerned, this is a risky space in the present environment. Our preference would be quality midcaps, rather than smallcaps, as the latter is fraught with high risk, even though some of them could be potential multi-baggers.

RBI has left interest rates unchanged in the recent monetary policy review. What would be the expected rate action in India when the US rates are expected to go up? How should investors align their bond portfolios to ensure a better risk-reward?

RBI’s decision to leave interest rates unchanged in the recent monetary policy review has been in line with expectations. The cut in inflation forecasts resulted in a temporary sentimental boost for bonds and we witnessed a sharp fall in bond yields. However, bond prices have given up these gains in the past couple of days due to a larger supply of state government paper and a lack of appetite of historically large buyers, such as PSU banks who presently have bonds in excess of SLR requirement, and limited visibility for treasury gains during the year. On a positive note, reduction in gross borrowing, coupled with a lower figure for the first half of this new financial year, as well as increase in FII limits, would prevent any material rise in yields from current levels.

We expect an extended pause from RBI, and a narrow range in terms of secondary market yields around the levels witnessed this month. In other words, we do not expect a rate-hike in India during the current year in spite of US rates being expected to continue to see hikes over the course of the year. The present level of interest rates in bonds provides a good entry-point for investors into fixed income ULIPs/mutual funds from a longer-term perspective.

With rising volatility in financial markets worldwide, is it wise to have some exposure to gold?Historically, there has been investor interest in gold as a safe haven, whenever there are concerns on the economic or geopolitical front, or whenever there is a sell-off in risk-assets. Accordingly, we have witnessed a renewed interest in gold over the past 12-15 months, and gold prices might see a further uptick in the near-term, given the global environment. However, an investment in gold would have disappointed investors over the past five-year period, with an annualised return of less than 1% even in rupee terms. We continue to view other asset classes more preferably as compared with gold from a long-term perspective.


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