'Expect some more consolidation in stock market, choose large caps'

Equity markets entered a correction phase around September-October 2034, but we have seen some recovery in the last few weeks. Even amid escalating tensions between India and Pakistan, markets haven't fallen sharply.  In an interaction with THE WEEK, Shridatta Bhandwaldar, head of equities at Canara Robeco Mutual Fund, sees markets going through some more consolidation and his preference is still skewed towards the large caps.

Q. You have maintained for a long time that ultimately it is earnings growth that drives the markets. We are in the middle of an earnings season, what have you observed in Q4 and does that give you optimism for the year ahead?

I think the only indication that I get from Q4 is that it is not as bad as it was thought earlier. So, it is turning out at least either neutral or at the margin positive. It does not mean that there is a lot of growth, but it only means that the disappointments are a little less than what they were.

Given those three factors which is basically what is happening in with government capex, which has come back, what is happening with the liquidity in the system, what is happening with the credit to the part of the market, which was kind of not getting enough credit, the little bit of a movement towards private consumption from government side...
 
Combination of all those things, our sense is it will bring back the earnings up to about nominal GDP growth rate as you go through the next three quarters. That is where also market is not getting too worried incrementally about earnings. Otherwise, the market would have actually corrected even more.
 
Q. The market, which was in a correction, seems to have been recovered a fair bit. What is your outlook? There is still some uncertainty around the trade tariffs; in recent days tensions between India and Pakistan have escalated...
 
On an absolute basis, the valuations are at fair valuation for large cap, not so much still in mid-cap small cap, but at least the froth is out. The disproportionate expectation that people were building in and thus the stock prices or valuations, have corrected.
 
The market corrected 10-15 per cent, the next leg will be more time correction wherever earnings do not pan out.
 
Earnings are still 5-7-10 per cent depending on the sector. So, if you spend another probably 6-8 months, the 22 times say small cap valuation will correct by another 5-7 per cent. So, we think that for the broader market, we are more in that phase where basically when the market has come back a little bit, you are still in a consolidation zone where the valuation excesses have to be digested further.
 
The broader market will see more correction now incrementally till the time earnings start catching up.
 
I think we have already seen the impact of tariff policies. It hurts the US and China significantly but given India's inward-looking economy, the country is positioning itself as somebody who wants to do a trade deal with the US faster because we are going to be the net beneficiary of what is happening globally. I think there is a very high probability that we will have a fast deal with the US ahead of many other countries.
 
As far as the India-Pakistan conflict is concerned, I think it is anybody's guess. Our view has been that India will escalate it enough to damage Pakistan both economically and militarily, but will not escalate enough to actually have a full-fledged conflict.

Q. Right now from a portfolio perspective, would you still be skewed towards the large caps?
 
Yes, we are still skewed towards that. In terms of sectors we are skewed towards well run NBFCs and financials, the life insurance companies, few select capital market names, not all of them like last year, pharma, telecom, aviation, hospitals, hotels, the consumer discretionary... So, where there is a resilience in earnings or relative resilience in earnings, those are the parts where relatively we are more constructive and then you have basically commodities, oil and gas, IT where we are underweight.
 
Q. You are launching a multi-asset allocation fund. Why now considering that there are many funds already in this category?
 
As of now, only half the AMCs have roughly the product. We are not trying to time it. It is about only two factors, is there an investor set to whom this product is relevant and likely to have relevance for a longer period. Any asset allocation product has a huge relevance in the Indian context as Indian investors barely do asset allocation.
 
For most people, fixed-income real estate will be probably 70-90 per cent of their net worth, and at the same time, a lot of them are afraid of equity because it is a relatively more volatile asset class. So, you need to give them a solution which caters to them in terms of asset allocation, ensures that their asset allocation is right by outsourcing that job to the fund management team or AMC and at the same time, give low volatility and respectable return and respectable risk-adjusted experience. That is what we are looking at rather than actually looking at it as time.

Q. From a 12-month perspective on the equity front, are you seeing flattish kind of returns or would you see the double-digit returns coming back sometime?

It is very difficult to call out, it would be a function of earnings and our view is that gradually the earnings will recover.
 
We see some consolidation in the band also given that market has come back 10 per cent from the bottom. But as evidence of earnings comes back the market will start rolling over, particularly the large and mid-cap, because there, the valuation is not a challenge anymore. In the broader market, we will still see some consolidation.

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