Pick stocks across sectors and market capitalisation: Ajay Tyagi, UTI AMC
As demand and real GDP growth picks up, you will see inflation showing a bit of a catch up.
How do you see various consumer companies preparing for the festive season?
There seems to be a lot of bullishness about the second half. Consumer companies are expecting that this festive season, which had started from yesterday, to augur well for them; consumers should come back and some of the companies are also planning to pass on the benefits of the tax rate cut back to the consumer to stimulate demand. But quite frankly, we will have to see to believe it over the next few months.
As of now, our read is that the consumer sentiment is fairly low. Whatever measures the government has taken are more supply side measures, rather than demand side measures and it is therefore left to the corporates to pass on the benefits of the tax rate cuts to stimulate demand.
What are your thoughts? Do you think there is latent demand in the system and also is RBI supposed to meet on Friday? Do you think a rate cut will happen once again?
Yes, as far as the consumer demand is concerned, I would agree that there is genuinely a lot of pent up demand in the system. I for one, do not believe, that if we just talk about the auto sector that the country has moved to different structural orbit altogether, wherein the demand for autos will be structurally lower than what we have witnessed over the last five or 10 years.
It is genuinely a question of the customer pulling back its demand because of the overall sentiment in the economy and these things make a lot of difference in as far as discretionary spend like auto is concerned. So there does seem to be a lot of pent-up demand. It is a question of the consumer sentiment returning back into the economy because the consumer is also reading the same newspaper that you and I are reading and is therefore also getting a bit jittery by the spate of negative news that came over the last couple of quarters. So some pullback in the consumer sentiment can actually put the equation back into shape. as it was say six months back.
What are your thoughts on the way market correction has panned out? In the last one and a half years, the way growth has moderated, should investors brace for lower double digit returns (10-12%)? Do you think 15% plus kind of CAGR returns is possible in a portfolio which is a combination of largecaps and midcaps?
That is a tricky one because you are asking me to do some bit of crystal ball gazing but from a very basic tenet of 12% versus 15%, inflation plays a very important role in the overall return expectations in any asset class. Even the risk-free rate that you get is also determined by the kind of inflation expectations that you have in the overall economy. So if you feel that inflation is going to remain benign over the next three to five years compared to what it used to be over the last five to 10 years, then it will show up in the overall returns that you get from any asset class over the next three to five years.
While structurally inflation will be lower compared to what we had in the last 10 years, I am not in the camp that feels that inflation will remain at 3% to 4% forever. My sense is that as demand picks up in the economy and as real GDP growth picks up in the economy, you will see inflation showing a bit of a catch up. It may not be the 15% which was predicated on a 5% to 6% inflation over the previous decade, but possibly so. Therefore, you will have to tone down your return expectations from equities as an asset class but it may not also be 11-12% which is now being built on an inflation number of just about 3% to 4%.
The truth could be well be somewhere in the middle. It is during times like these that people become fearful, look into the rear view mirror and look at the gains made or the losses actually incurred over the last two or three years and try to extrapolate them.
Do not forget that we were in a similar situation sometime around 2012 and 2013 and investors who did have the courage to invest into equities at that point in time, albeit selectively studying the business model of various companies and making a portfolio of strong and resilient companies, were rewarded over the next five years.
Equally, investors who jumped in around 2016 and 2017 because they saw the returns over the previous couple of years which were extremely gratifying, have actually not made any money over the next two years from 2016 or 2017. It is the same script which keeps playing over and over again. To my mind, this is an attractive market to increase exposure towards equities but yes, you have to remain patient and look at the next three to five years.
Which section of the market right now offers best risk reward -- is it the midcaps, smallcaps or large caps or a combination of three, if one were to do a five-year SIP?
I would always encourage a combination because the minute you say that you are investing either into a pure largecap or a midcap or a smallcap, you are basically restricting and you are not providing yourself the elbow room to pick up the best ideas from across the board. Therefore, whether now or anytime in the future, I would always encourage investors to look more at picking stocks across the wide spectrum.
The auto sector in particular provides very favourable risk-return opportunities for the simple reason that people are extrapolating what has happened in the last few quarters into possibly a new normal for this sector over the next few years. I think that is far away from the truth. We could well see a very sharp recovery in the auto sector, possibly sometime in CY2020 and that can change the perception towards the sector and therefore the valuation that this sector is now trading at very sharply.
I also see opportunities across the banking space where some of the banks have been punished as have been pharma and healthcare services. So, there are opportunities across sectors and across market capitalisation. You just have to be sure about the underlying business that you are picking up and wanting to stay invested in over the next three to five years.