Biggest change that has come in last one year is massive shift in asset allocation, says CNBC-TV18’s Udayan Mukherjee. Domestic investors now prefer assets like equity and debt than gold and real estate, he adds.
Mukherjee says that besides subdued earnings, slow reforms pace by government in last one year has dampened market sentiments. Earnings recovery, he says, will continue to disappoint for another quarter or two.
He expects market to recover in next six months. He is bullish on midcaps and says the segment will take-off in mid-2016 and 2017.
Mukherjee advises investors to look at strong segments from midcaps like consumption, pharmaceutical, cement, infrastructure and auto.
Below is the transcript of Udayan Mukherjee’s interview with Latha Venkatesh, Anuj Singhal and Sonia Shenoy on CNBC-TV18.
Sonia: There are no fireworks this year as the market is flat between last Diwali and now, but what is the advice that you are giving to retailers or rather retail investors from now to next Diwali? Keep the faith and continue investing?
A: It has been a bit of a damp squib of a year, but I think it is important to remember that the three years which preceded it were pretty good years for equity. So, I do not think having put in such a lot of money, domestic investors should actually fret too much about one year which has not gone so well.
I think the big story of the last one year is that tectonic shift in asset allocation which has happened from domestic investors, and I think that is the key message for this Diwali that after 5-6 years of staying out of the equity market, there has been a massive shift in asset allocation and nothing explains it better than the figures which have gone into equity and debt.
Funds from domestic investors, Rs 52,000 crore net since last Diwali to this Diwali from equity investors. Rs 80,000 crore has gone into fixed income fund from domestic investors. I do not have the figures readily but I think you will find that investments in gold in the same period have gone down dramatically and investments in real estate have slowed down significantly from the domestic investor fraternity.
So, we saw the beginning of this before last Diwali or after the election results in 2014, but the pace has really accelerated from last Diwali to this Diwali in terms of money coming out of gold and real estate in various pockets and going into the twin asset classes of equity and debt.
And to answer your question, I think there is nothing to suggest that people should switch out of these two asset classes where they have pumped in nearly Rs 1.3 lakh crore over the last one year. But I think fixed income looks good because interest rates will go down further which means that guilt funds and such funds will make a lot of money.
I think after a fairly pedestrian year that has gone by for equities, maybe this Diwali to next Diwali I will stick my neck out and say it will be a better 12 months, thought the gains might be slightly back ended, the next 4-5 months might still be a bit challenging, but towards the latter half of next year, or that summer-monsoon period of 2016, investors will make gains once again in equities.
So, not the time to panic at all. I know there has been disappointment this Diwali, but I guess by next Diwali, things might even out.
Anuj: At the start of the summer of course, we had this Modi premium, a lot of money coming into the market, but now we have corporates complaining, we have the foreign institutional investors (FII) selling a bit. What do you think a retail investor should expect from the government now?
A: It is best to not keep expectations very high, because that is one reason why the market has not done very well over the last one year. And it is an important point to labour. I think expectations really went up a lot after the last election result and people started pricing in a pace of policy recovery and execution which is usually not seen in India. And that is the reason why foreign investors have not put in too much money over the last one year to work at all, because frankly, they were quite disappointed.
If you take the period from the 2015 Budget to now, that whole period has been marked by some serious policy disenchantment. People have been frustrated at the pace at which the recovery has come through. And policy in action or lack of very speedy policy action has been one reason for that and that kind of premium has slowly eroded with the passage of time.
The other factor of course, which has weighed on market performance over the last 12 months is that fact also led by not very swift policy action is the fact that earnings recovery has just not kicked and that has the potential to disappoint the market for another quarter or two at least, which is why I make the point that a serious take off in the market or a resumption, visible resumption of the uptrend might actually happen only in the second six months of the 12 month period between now and next Diwali.
I do not expect any massive policy action to happen between now and summer next year but partly because of the kind of political news that we have seen off late and the earnings recovery which is still quite elusive looks like it might stretch our patients for another 33-6 months.
Which means, for the near-term, one should expect probably an average kind of a equity market. I do not see massive downsides, but that serious acceleration in the uptrend with foreign money coming in once again, we might have to wait till well into 2016.
Latha: That is at least some cautious optimism. But, let me straightaway come to the stocks. Midcaps have had it good this year on an average, but for a retail investor, there are landmines and gold mines in this space. Any gold mines that you can spot for them?
A: The good way to this is to say do not look at midcap as a basket, because it never works that way, you know that. There are out of 100 stocks, 50 stocks have been howlers over the last one year and 50 stocks have done very well. As an aggregate, the midcap index has gone up some 13-14 percent which looks good. But that kind of aggregation hides more than it reveals. The way to do this I would say is probably pick out 4-5 sectors and say I like these sectors and within these sectors, I will try and pick out a couple of midcaps each and stay with them.
So, the pockets which I think, if you have a two year kind of horizon, I am extremely bullish on midcaps over a two year period as I was a while back. This year has been bad, relatively okay compared to largecaps. But I think 2016, second half and 2017, you will see midcaps take off in a big way once again.
I would identify pockets like consumption, pharmaceuticals, autos, cement and infrastructure. These five sectors and try and see if you can pick two from each sector, two really high quality midcap pharmaceutical names, two high quality midcap consumer names, two reasonably well-performing infrastructure names and cement has a good chance over the next couple of years to do quite well. Some midcap cement companies have actually done quite well this year as well. Maybe I should have added financials and non-banking financial companies (NBFC) in that list.
But if you do this exercise and come up with a list of 10 reasonably good quality stocks which you do not have to go out and say I will buy completely bombed out performance now because of valuations, but still stick with quality, I think you have got a reasonable chance on making fairly good portfolio return over the next two years or so.