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We can hope for a positive close from here to end of the year: S Krishna Kumar, Sundaram Mutual

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Last Updated: Aug 14, 2019, 11.01 AM IST|Original: Aug 14, 2019, 11.01 AM IST
S Krishna Kuma2r-Sundaram AMC-1200


  • Valuations attractive to look at from a three-year perspective.
  • MNCs increasingly putting more money to work on the ground.
  • Stocks have gone through a huge time consolidation.
Around the bottom, we see earnings yield gap closing between 10-year G-secs and equities. We are nearly there at this point in time. So we remain optimistic, says S Krishna Kumar, CIO - Equity & Executive Vice President, Sundaram Mutual Fund. Excerpts from an interview with ETNOW.

Just trying to make sense of the market mood and the kind of exodus that we have seen from foreign money. Of course, the economic slowdown is playing out. What should an investor do?
Over the last few quarters, we have been going through a lot of news flow on the degrowth in the auto sector. The housing sector has also been pretty slow. These are two big parts of the economy and that is hurting.

At the same time, some of the proposals of the budget have not been taken well. At this point in time, we are seeing that the government also seems to be quite concerned and acting on it. We do expect a lot more measures to come through over the next week or so, which will provide a bit of more fiscal stimulus. Also, on the RBI side, we have seen more action coming through. The budget proposal has now been implemented through the surplus that came out yesterday.

NBFCs definitely have a window of liquidity coming in and this broadly covers most of the NBFCs which were worrying about it. So, that is a very positive sign at this point in time. The valuations are quite comfortable in broad markets and Nifty as well and there is also a relative discount of midcaps to the largecap indices etc. There is definitely good comfort there.

Also, if you keep tracking the earnings yield gap between the 10-year Gsec and equities, this is moving to a territory closer to zero or negative in case of midcaps to Gsec yields. Typically in the past, yield gaps closer to zero tend to show that for the next three years, equities outperform by about 50%. You might still go through a time consolidation but broadly you are around the bottom when you have the earnings yield gap closing and we are nearly there at this point in time. So we remain optimistic.

Economy goes up and down and entrepreneurs always take risk but right now the unfortunate sense I am getting from the big corporates, the risk takers is that we do not feel safe to invest, if we invest we do not get good post tax returns, banks are not giving us money. But if nobody wants to invest. what will happen to economic recovery?
A couple of things here. The way of doing business has changed over the last five years. The IBC act and a lot of other things have come through. Definitely, guys who have been heading on the wrong side, have been finding it tough. The second point is more on the listed entities and corporates with credibility. Definitely the industry is trying to put a lot of pressure on the government to give them sops. There are layoffs happening in factories and the bank is not ready to lend. That is why markets and corporates put pressure on the government and the policy makers to act.

In light of what has happened in the last two-three months to the auto and the housing sectors, the corporates have made a point to the government that things are not easy and they need more space and incentives going forward and urged rollback of a few of the measures which are probably hurting them.

The government in its own wisdom in the last one week has its own discussions and we expect some relief to come through. That is what we believe will change the environment also. When we talk about domestic corporates, also look at the FDIs that have been getting, look at the kind of buyouts that PE funds are making and the other big investments that MNCs have made in the country. They are increasingly putting more money to work on the ground.

We have auto companies setting up shop here when domestic auto guys are worried about growth. So, there is a disconnect between what the foreigners are seeing in India from a long term perspective and what Indian corporates are looking at. I think it is more of pressure tactics on the corporates to push the government to give them more space.

Are you hunting for value in industrials and cyclicals or do you think one has to revisit consumption because that is the only engine where there is hope of recovery?
The consumer discretionary part is also cyclical. A little bit of cyclicality is playing out there in terms of auto definitely and if you look at the low ticket consumption, consumer discretionary items like durables and white goods, brown goods, things have been pretty much okay but there’s a mild slowdown. We think the stocks have gone through a huge time consolidation. Valuations are getting far more reasonable and attractive to look at from a three-year perspective.

We are definitely adding up consumer discretionary as we speak and also on the other pillar in terms of investment cycle, it is an under-invested space and we do find that in the next two years, there will be a lot more positive news flow coming in terms of the order book improvement and the investment cycle picking up. Definitely, the government is doing its bit.

The first three, four months have been slow because of the government coming in but the rest of the year, there will be accelerated government spending on infra and that will push the private sector also to relook at their own plans in terms of capex for the next year. A combination of industrials and cyclicals and consumer discretionary is what we are positive on and adding to the portfolios.

The slowdown in the auto sector is deepening now with sales coming in at a two-decade low. Even the timing of the slowdown, coming at a time when a lot of these auto giants are struggling with shifting to the new emission and safety norms seems to be piling up at a very bad juncture. What does this spell for the auto space because you seem to believe that in the long haul there is potential?
The automobile sector is in a bit of a spot because of the incremental costs from BS-VI transition, which are different for different sectors. However, given the stiff cost hikes that could happen in commercial vehicles and two-wheelers, these are two areas which could see a good amount of pre-buying that will happen now in the fourth quarter. Book-building also needs to be done in commercial vehicles. There will be a lot to be upbeat in commercial vehicle sales in the next four months. After that, it could normalise.

Passenger cars however, are going to go through a little bit of a slow growth in the next six months. As the festive season dawns, there will be some recovery and NBFC funding is also getting better with some of the measures taken. That will give them a bit of a boost in the second half.

Overall, it could be closer to zero to minus 5%. However, going into FY21, things might improve. The rains have been good, the agriculture space is going to do better, freight availability is going to be better. There could be some more prosperity from the rural side that could kick into two-wheeler sales and low-end automobile passenger car sales in the next one year.

We believe that auto sector could be a little bit more of a soft story for the next six to 12 months but we would probably look at the space a little while later.

From August to say the end of the financial year, are we in for a flat or a volatile market? Markets are fundamentally oversold and we are in a value zone and double digit gain from here to year end -- in about eight, nine months -- cannot be ruled out?
I would at this point be more positive on the markets. We have had a good amount of volatility, a lot of corrections and definitely the froth is completely out of the market. Whatever flows came in the last few months -- a lot of that from the foreigners -- has gone away. That was more of an event-led money. At this point in time, if we look at the current macro framework, we would probably believe that the valuations are quite supportive and any improvement in data over the next three to six months, will result in positive move on the markets.

Given the 15-16% growth that is on the cards for FY20 and FY21 on the Nifty and the broader market earnings, we can hope for a positive close from here to the end of the year.

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