Midcaps may outperform in next 1 year; positive on banks and autos: Karvy

June 12
14:58 2019

We believe that the market is entering a risk on mode and midcaps are at a 10 percent discount to large caps. Thus midcaps should do well over the next one year, Vivek Ranjan Misra- Head of Fundamental Research at Karvy Stock Broking said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpts:

Q: Do you think RBI should have done more in its policy meeting to push growth and investment in the Indian economy?

A: The RBI has cut the repo rate by 75 bps in quick succession. There are a couple of issues though; firstly, liquidity has been a bigger problem, and secondly, the transmission of rate cuts needs to be addressed.

The central bank has carried out liquidity infusion. It has conducted a number of Open Market Operations or OMO, in addition, it has conducted FX swaps to infuse liquidity as well. As a result, the monetary system now has excess liquidity.

Q: How safe are debt fund now given rising concerns from IL&FS and DHFL fiasco that could push investors away for some time now?

A: This is definitely a big negative and is likely to impact inflows to debt funds in particular and could have some impact on inflows to mutual fund schemes investing in other asset classes. In case of debt mutual funds, the impact may last for a while.

Q: Where do you the market going from here on?

A: We don’t think there is a major downside to markets, but, on account of profit booking, markets are likely to take a breather and be sideways for a while.

We believe the current weakness in the economy is likely to reverse by Q2 or Q3 FY20 and growth will be led by capex spending, which should help in growth for corporate earnings.

Q: Do you feel that the broader market could outperform, and if yes, then why?

A: Midcaps do well when markets are in a risk on mode, and valuations are at a discount to largecaps. We believe that the market is entering a risk on mode and midcaps are at a 10 percent discount to large caps. Thus midcaps should do well over the next one year.

Q: Are there any sectors that are at risk due to global or domestic factors and investors should limit their exposure to them?

A: We are overweight on banks, capital goods and autos as these are geared to a recovery in the economy and recovery in capex spending. We would avoid FMCG on account of high valuations and lower growth prospects.

Q: If an investor in the age bracket of 30-40 years plans to invest Rs 10 lakh via mutual funds, what would be your advice?

A: About 70 percent should be invested in equities and the rest in cash and fixed income. Within equities, about 80 percent allocation should be towards largecaps and the balance in midcaps.

Q: The auto sector has been on the sell list of both MFs and FIIs. Do you think this sector could emerge as a dark horse in the next 12-24 months? 

A: We are overweight on autos as we believe the sector will recover in a couple of quarters. The sector is interest rate sensitive and has been impacted by the lack of liquidity as well as inventory buildup.

As liquidity is restored and the economy recovers, the sector is likely to perform well over the coming year.

Q: What is your first take on March quarter results? 

A: March quarter results were a bit below expectations. Topline growth was below expectation on account of the slowdown in the economy, in addition, margins were under pressure as well. FMCG and autos disappointed whereas banks did well.

Q: Benchmark indices are up 10 percent in 2019. Do you think this momentum will continue?

A: Central bank action shall have an impact on money markets and restore growth prospects. While the market may take a breather in the short term, medium to long term prospects look good.

We believe growth is likely to recover by Q2 or Q3 FY20, and corporate earnings growth is likely to recover. Trade war is a major risk, though a dovish Fed is supportive.

Q: How are we placed among emerging market peers?

A: India is better placed among emerging market space from a medium to long-term perspective. This is because of resilient growth in India, better long-term growth prospects, better profitability of firms and likelihood of economic reforms.

The major negatives are valuations, increase in weight of China in EMs, which has resulted in a drop of India’s weight leading to some outflows. But this doesn’t take away the strong fundamentals.

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