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  1. Don’t miss out on this earnings recovery cycle, pick stocks with these qualities, says Aegon Life CIO

Don’t miss out on this earnings recovery cycle, pick stocks with these qualities, says Aegon Life CIO

After a long period of subdued quarterly results, corporate India is at the cusp of earning growth cycle. Saibal Ghosh, CIO, Aegon Life Insurance, says that stock market focus would be to capture this cycle.

By: | Updated: August 29, 2018 11:08 AM
While the impact of 2019 Lok Sabha election would be temporary, stock market is not yet pricing in this risk, Saibal Ghosh of Aegon Life Insurance says.

After a long period of subdued quarterly results, corporate India is at the cusp of earning growth cycle. Saibal Ghosh, CIO, Aegon Life Insurance, says that stock market focus would be to capture this cycle. He advises investors to pick quality stocks with proven business model, strong brand and earning visibilities to make the most of this opportunity.

While the impact of 2019 Lok Sabha election would be temporary, stock market is not yet pricing in this risk, he says. Taking stock of the recent midcap and smallcap correction, Saibal Ghosh points out that rising rates scenario generally does not help mid and small cap stocks as their balance sheets are 4-5 times more leveraged than the large cap stocks. However, quality mid caps have remained resilient amid a larger rout.

Sushruth Sunder of FE Online recently interviewed Saibal Ghosh, CIO, Aegon Life Insurance, who has an overall experience of 27 years in the industry. Ghosh shares his outlook on the stock market, mutual fund flows, the capex cycle and where he’s finding value in the current market. Here are the edited excerpts:

What is your near-to-medium term view on the stock market outlook?

Directionally we are in a rising market scenario as India is at the cusp of earning growth cycle after almost 5 years of stagnated earnings. Therefore the market focus would be to capture this cycle. As a result quality stocks with proven business model, strong brand and distribution reach and high earning visibilities would gain the most at the beginning of the cycle. However, such long extrapolations of future earnings in current market price will always be subject to systemic risks, both global and local. Market will remain volatile in medium term.

We seem to have come out of a small and midcap mayhem, and the space is showing signs of a rebound. Is the worst behind us, or is there further correction in the offing?

Rising rates scenario generally does not help mid and small cap stocks as their balance sheets are 4 to 5 times more leveraged than the large cap stocks. However, that said quality mid cap stocks are well in favor and have not corrected much. I think more than mid and large cap story here the quality stocks will remain resilient at this stage of the cycle.

What is your view about the NPA resolution process?

Fresh slippages have been coming down in last few quarters. There have been some progress in structured resolution process that is in place now. My feeling is that we are near the end of tunnel.

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Your thoughts about the capex cycle. Are there some interesting trends?

There have been hardly any capacity addition in last 5 years. Therefore even with 10% to 12% nominal GDP growth, the output gap is closing for sure. We are seeing some early green shoots, but you have to acknowledge that this time around there would be more brownfield expansion than the greenfield ones that we witnessed in last cycle. The capex recovery this will be slow and prolong.

What impact is election 2019 likely to have on the stock market? What would you advise investors?

Market is not yet pricing in election risk. However, I think either ways the impact of election result will be temporary. Except land and labor we have had tremendous reforms that have been implemented in last 4 years. I am quite hopeful that impact of such reforms will play out in corporate earnings in the years to come.

There seems to be an earnings bounce back in the latest quarter. Which sectors have done well in your assessment, which sectors must investors look at?

We have seen some good results during the quarter. However, one must understand that incremental earning growth in Nifty stocks in FY19 is not coming from pure domestic economic growth story. A large part of this incremental earnings are coming from resolution of NPAs of Corporate Banks. That part of the earnings have largely played out in the last quarter.  However, that said we are seeing few important trend in this quarter’s number. One, while fresh slippages are coming down for the banking sectors but quality private sectors banks seem to have given up bit of their margins in order to gain market share. Two, there have been across the board consumption recovery in both rural and urban sector. And three, while demands for auto sector is largely in line but they are facing margin pressure due to raw material cost inflation. Overall, a decent show despite marginal cut in FY19 Nifty earnings due to not so good numbers from couple of large cap stocks.

The mutual fund inflows have seen some kind of tapering in the last two months, receding from highs last year. Is this trend likely to continue?

I would not read too much into short-term data trend as I firmly believe that there have been a structural change in the savings behavior. We will continue to see shifting of weightage from physical savings to financial savings on account of lower than historical inflation, large scale financial inclusion and digitization of payment system. A large part of this transition will flow through Insurance Companies and Asset Management Companies.

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