India Betting on Power, Telecom, Corporate Banking & Pharma

At these levels, the broad market is fully valued. In mid- and small-caps, it is overvalued, and in large-caps, the sectors which are undervalued continue to remain so, and don’t go up. Quality stocks are overvalued. However, inflows continue to come into equity, and that is pulling the market up.

On parameters such as price earning (PE) to GDP and valuations are not cheap. However, India is one of the few countries where the earnings cycle has not yet kicked in, and the good things that there’s no bubble in the equity market. Given this, investors cannot make big money from equities from here onwards. Hence, they should invest for moderate returns.

Rising oil prices worry us a lot. A $1 increase in oil prices leads to import bill going up by up to INR 7,500-8,000 crore. Our current account deficit rises by the same amount which is $1.2 billion. This makes the fixed income market weak, rupee relatively weak, inflation high, therefore higher interest rates, which will have its own impact. Fundamentally oil is at a level from which it can go down. But factors such as Iran sanctions can influence oil prices.

Trade wars do not have a huge impact on India. India’s trade as a percentage of GDP is low, and we are not an export-oriented country. We are not part of the European Union or any trade union and India is also not part of ASEAN (Association of South East Asian Nations). In my opinion, we have never been beneficiaries of trade, and have not been impacted by trade wars. India is a bigger importer than exporter, so we aren’t at any risk. There could be some collateral damage, but I’m not worried about that.

Corporate earnings have been okay so far. That corporate bank earnings will be bad was known to us and we were conditioned to accept that this quarter. Going ahead, earnings cycle will improve. But remember what happened to the results of an aviation company recently. Whether  it is priced in the market is a complex question. Rising oil, weakening rupee has their impact on earnings.

There are opportunities in PSUs; In sectors such as oil and power, PSUs are cheap. That’s one clear area I can think of. Financial earnings will improve, telecom should improve, with software and pharma having seen a bottom in the March quarter earnings. However, high valuations are discounting good earnings. We are betting on power utilities, telecom after the correction, corporate banks and pharma.

Macros are deteriorating and micros are improving. Stock markets are not discounting that now. Interest rates could go up in the US and one does not know the side effects of that now — that will be visible over a two-year period. Hence over the next couple of years, you will see a volatile market with limited prospect of high absolute return.

In an era where oil goes up, fixed income does not do well. However, if it does go down, it is a great asset class and it could give high single digit returns. What Howard Marks says is you should decide whether you should invest to make money or whether you should invest to try to save money. We are exactly in between, and hence we are forced to recommend defensive investment choices. We recommend long-term SIPs, accrual funds and balanced advantage and large-cap funds over mid and small cap funds.