Bottom-up stock selection with a combination of growth, macro themes and value is important
By Rahul Singh
As we approach the end of 2018, markets have given a lesson in investing over the past 12 months. The frenzied rally in the last quarter of 2017 was followed by a rolling correction – starting with midcaps followed by FMCG (on valuation concerns), NBFC & autos (on liquidity squeeze) and finally IT Services.
Besides sector-specific reasons, there have been broad under-currents at work too. The global cost of equity environment has changed even as micro demand factors and earnings have held up well. Given these set of factors, investment in equities over the next 12 months will be like swimming and not running.
Why do we say so?
Let us compare the differences between swimming and running. Swimming requires alignment of the entire body, muscles and breathing. While moving hands and legs faster would generally make you run faster, fast limb movement can be counter-productive in swimming unless coordinated with the rest of actions.
It is not enough to count on earnings growth and ascribe a higher PE multiple. Comparison with historical, cash-flow support to valuation and earnings visibility beyond FY20 will be critical.
Our investment framework relies on defined risk-reward criteria for the portfolio stock selection making it well placed for the current investment climate. Equity investing in any case is a like swimming — getting the discipline, coordination and breathing right and not necessarily just moving the hands and legs faster.
Our approach is primarily that of bottom-up stock selection with a combination of growth, macro themes and value with triggers.
Market outlook: Five trends
Crude prices have eased off, GST collections have shown promise and rupee/rates have stabilised as a result. These are much needed stabilising factors. In the above backdrop, we continue to back and/or watch the five trends that will drive portfolios through next year.
Financials: The dislocation in the financial markets over last few weeks was severe, even raising solvency risks. We believe that while those extreme concerns have subsided, growth aspirations of NBFCs will get curtailed leading to gain in pricing power for corporate banks. Besides, the stressed asset pool of corporate lenders has peaked which means lower loan-loss provisions and higher ROEs over the next 12-18 months.
Consumption: Consumption in FMCG and discretionary has revived after the disruptions of GST but festival season was relatively tepid. Lower fuel prices and stable interest rates can arrest this slide once the inventory normalises. But the overall impact of reduced credit availability (due to funding constraints at NBFCs) on the SME segments and income growth needs to be monitored
Capex cycle green shoots: Industrial capex cycle is recovering as capacity utilisation has improved at the margin. While the big bang capex in power and metals is missing, the strength in order books have been driven by capex in process industries & automation apart from the usual public capex cycle of roads and urban infra.
FMCG – follow the margins: Volume growth recovery in 1HFY19, margin performance and relatively sharp correction in stocks make valuations more palatable now. Companies with market share gain potential and margin tailwinds will make for better investments within FMCG.
IT – watch the risks: Higher US rates and trade policies has increased risks of an economic slowdown which could start impacting corporate IT spends as they finalise next year’s budget. The relatively inexpensive frontline IT stocks can fare better amidst this uncertainty.
-The writer is CIO, Equities, Tata Mutual Fund