The market is at a very interesting crossroads today
On the one hand, we have some encouraging demand-pickup trends seen through corporate results this quarter – with key trends including IT stocks seeing scaling up of digital projects; FMCG, discretionary companies highlighting improvement in consumer demand led by rural; cement stocks reporting better-than-expected realization trends and retail private banks seeing strong loan growth. However, on aggregate, a select set of companies (corporate banks, pharma) dragged down the overall numbers.
On the other hand, we have weak macro trends such as rising Current Account Deficit, oil prices, bond yields, inflation and a falling rupee. The macro trends weren’t always bad though. Since PM Modi took over in 2014, a lower CAD, controlled fiscal deficit, low inflation, stable / appreciating INR among other factors helped the Sensex rally ~50% and the small and mid-cap indices rally ~110% in INR terms. However, the market in 2018 so far has been in a see-saw mode. The Sensex hit a peak of ~36,200 in Jan 2018, dropped 10% over the next two months, rallied 6-7% thereafter, and then corrected again. The small-cap and mid-cap indices are down 15-20% from their peaks, while individual stocks have fallen 30% or more in some cases.
Given our constant focus on fundamentals, we are using these corrections as opportunities to re-evaluate our high-conviction positions and adding more as appropriate. Buoyed by strong domestic flows, 2017 was a very healthy year for equity markets across the board. Vinit Sambre, Head of Equities at DSP BlackRock said, “In the coming months, we believe market returns are more likely to be linked to earnings growth, given that valuations are already above average. As seen over the last year, bottom-up stock picking has created considerable alpha, and investors therefore may need to identify the right combination of stocks and sectors that can outperform the broader market.”
Below are four key themes that we believe could drive growth in 2018 and beyond:
- Increase in per-capita GDP boosting the India consumption story – and a consequent shift from unorganized to organized sectors.
- Penetration of financial services (retail and corporate credit, insurance, asset managers).
- The next investment cycle led by govt. capex on Oil & Gas, Defense, Roads, Railways, Urban Infra.
- Export opportunities in segments vacated by China, such as textiles and specialty chemicals.
Consequently, we are attempting to reflect these themes within our portfolios.
We like companies in the consumer discretionary segment like autos, white goods, consumer electronics (driven by housing for all, power for all and increased rural and urban demand), private banks (driven by stable asset quality and consistent increase in market share from state owned banks), selective stocks in cement (infrastructure and housing focus), healthcare (more domestic oriented) and gas utilities (governments focus on city gas distribution, improving utilizations and demand) while having a cautious view on IT, telecom (increased competition leading to lack of pricing power) and consumer staples (valuation concerns).
On overall market valuations, if one compares the current valuations to 2007-08 peaks, markets valuations are certainly not outlandish on key metrics like 12m forward PE, 12m forward Price to Book, Market cap/GDP or Corporate profits to GDP. On a relative PB basis, large caps appear more attractive versus small and mid-caps and hence we advise investors to use SIPs as the means to investing in the small and mid-cap category.
The DSP Group recently bought out BlackRock’s 40% stake in DSP BlackRock Investment Managers Pvt. Ltd. The reason for this is that the DSP Group did not want to reduce its footprint in the asset management business. BlackRock’s approach is to have a global integrated technology and operating model and therefore they expressed a desire to have a controlling stake in the company. BlackRock respected the DSP Group’s 152 year old legacy and their desire to retain a controlling stake. DSP BlackRock manages/advices assets in excess of Rs. 1,10,000 crore ($ 16.5 billion) across equity, fixed income and alternatives (as on 30th April 2018) with over 2 million individual investors.
