As the general elections near, investors are concerned about how to move forward on account of existing volatility in the stock markets. In addition, the trade war and ongoing Indo-Pak border tensions are further fuelling the uncertainty. However, the investors must not worry much as equities have traditionally offered robust returns especially in the election years, says a market veteran. Furthermore, the midcaps, a category which hasn’t performed to the expectations lately, have also outperformed broader markets making them good bets, tells WGC Wealth’s Rajesh Cheruvu to Financial Express Online.
“Midcap companies are trading at attractive valuations, with improving earnings outlook,” Rajesh Cheruvu, CIO, WGC Wealth tells Ashish Pandey of Financial Express Online.
Here are the edited excerpts of the interview:
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The stock markets have largely remained volatile despite the recent budget sops and RBI rate cut. Why is it so? How long will the volatility continue?
Markets have been volatile owing to the nervousness ahead of elections on policy stability and continuity. Sharp fall in flows from both FPIs and DIIs have led to drop in market breadth, hence market has been reactive to every piece of negative flow of information. Global and regional markets on the other hand have been in positive momentum, rejoicing the US Fed’s potential decision to pause rate hikes.
What factors would drive the stock markets going forward?
In the near term, the only factor that can drive market stability and upward move is the electoral outcome of a stable government. Pre-election surveys are likely to be printed in next few weeks and could indicate some direction.
With equity mutual fund inflows falling to a 2-year low in the month of January. What is the likely trend going ahead?
In the last two months, domestic participation has sharply slowed from $2.2 billion of equity MF inflows in Dec-18 to less than a billion dollars in the month of January. However, SIP flows continue to be strong and are expanding month on month from Rs.8022 cr in Dec-18 to Rs 8065 cr in Jan-19. Drop in net inflows (Inflows minus outflows) could be due to negative returns in domestic investor folios in the last one-year.
In the absence of attractiveness of other asset classes like debt, gold and real estate, we think equity inflows would persist structurally. However, a reversal in near term slowdown could emerge with clarity from electoral outcome, be it via pre-election surveys or post the mandates.
Is there a fear in the market related to pledged shares?
Market reactions to ZEE and Emami news flows suggest that participants are concerned, however we think these concerns would recede as credit and liquidity environment improves over the next six months.
What’s your take on NBFC crisis?
Post IL&FS event every data point related to credit quality of any financial institution has led to severe sell off, with the efficacy of credit ratings itself challenged. Further, questions over excessive use of short-term borrowings to fund long-term lending have raised concerns of asset liability mismatches. This has led to sharp risk aversion to short-term issuances and hence, worries of repayment and access to liquidity. This has forced most of the NBFCs to shift their focus to redemptions and rollover of debt from lending growth.
Also, allegations of corporate governance and credit evaluation processes of NBFCs have called for regulatory scrutiny and this has compounded the situation with severe trust deficit and credibility crisis for these entities. We think, the ongoing time-bound investigations, forensic audits and clearer regulatory frameworks could restore confidence over a period of time. In the interim, these NBFCs could lose their business and market share to private banks.
Share your advice for retail investors?
Risks of market volatility due to political uncertainty ahead or post elections remain. Historically though, looking at past two decades of elections and market behaviors, such price volatility has had very little impact on the long-term wealth creation trajectory. In the past, during the years of parliament elections, equities have consistently delivered healthy returns.
Currently, macro fundamental factors like economic growth, inflation, trade deficit or fiscal deficit and forex reserves are in a pretty robust shape. Further, favorable earnings outlook, healthy domestic participation and reasonable valuations make the recipe even more perfect. Policy continuity is the only uncertain aspect that market participants are looking to gain clarity on. Hence, this time as well, expect markets to behave the way it has in earlier election years. Current times too make for perfect inputs for starting client portfolio construction.
Where should investors invest – large-cap funds relative to mid-cap funds?
Asset allocation continues to be the towering principle for investment decision and investor portfolio allocations. Midcap companies are trading at attractive valuations, with improving earnings outlook. We see this as an interesting opportunity to investors to generate superior outperformance – hence, tactically overweight Midcaps. Historically, equities have delivered strong returns in election years, and midcaps have further outperformed broader markets making their case attractive.