The Indian markets are still in a structural bull run which started in 2014 and the current phase of the market should be seen as a period of consolidation, Anirudha Taparia, Executive Director, IIFL Investment Managers, said. He advises investors to stick to quality stocks and weed out poor performers.
Taparia is betting on quality names in the NBFC space, private banks and domestic consumption stocks. "The IT sector could be one of the dark horse sectors for 2018. Domestic consumption-oriented sectors could be another contender for the dark horse sector of 2018," he stated.
Q) After hitting a fresh record high earlier this week, the momentum seems to have fizzled out. Do you think the momentum will continue?
A) Indian markets are in a structural bull run, which started in 2014. The current market phase should be seen as a period of consolidation. Sectors and companies which had run ahead of fundamentals and had become obscenely overvalued are now seeing a correction. Otherwise, there has not been any change in the structural bull run in Indian markets. Such periods of sideways consolidation existed in past bull runs too.
Q) The market is at a record high, but most investors are not happy because their portfolios are not reflecting the same. What should investors do now: wait patiently or churn portfolio?
A) There has been a huge divergence in the index and individual stock's performance over the past 6 months as a few index stocks are holding up the index whereas the broader market has seen profit taking.
The pain is more severe in overvalued midcaps and smallcaps which has seen the sharpest corrections. Unfortunately, most investor portfolios over the past 1 year have become overweight on midcaps and smallcaps and even microcaps.
Hence, most investors are not happy even though the index is at record highs. Investors should review their portfolios and separate poor-quality companies from the good ones and continue to hold quality names.
Many investors tend to add many stocks just on hearsay in the bull run and do not evaluate the fundamentals of the company properly. Such companies in the portfolio should be sold and quality names with consistent earnings track record and visibility should be added.
Q) Any stocks which have the potential to turn multibaggers in the next 2-3 years?
A) We do not recommend companies for multibagger returns but look for those that can provide a consistent internal rate of return of 18-20 percent across all market cycles and outperform all asset classes in terms of returns. We think quality names in the NBFC space, private banks and domestic consumption stocks would fit in this bracket.
Q) The entire market rally was led by 8-10 stocks. At the same time, the rest of the market is a bit shaky. Do you expect this momentum to continue?
A) Such divergence in index levels and the broader market doesn't stay for long and has to converge towards the normal. The catch up in largecaps and sell-off in midcaps and smallcaps is purely because of a valuation mismatch, which was prevalent say 6-8 months back.
The market is finding comfort in largecaps and hence reallocation is happening towards these few stocks. Many quality names in midcaps and smallcaps too have become attractively priced and long term investors can definitely look at adding those.
The next 12 months is quite eventful with regards to the political outcome. Markets could take a breather before seeing any meaningful broad-based rally. However, investors could use the period to accumulate quality names across market capitalisations.
Q) How do you see escalating trade war concerns turning out for Indian markets?
A) Trade wars is one of the biggest challenges for the global economy and equity markets globally in the near to medium term. If experts are to be believed, it is the tip of the iceberg and the current tariff war could blow up many times over and disrupt the global trade balance which has set in after years and years of globalisation.
For India, there would be both pros and cons. Any direct trade tariffs imposed by the US would hurt Indian exporters. On the flip side, better trade negotiations with other major countries (EU, the UK, and China) may emerge, which would benefit India's exports to these countries. Also, imports might benefit from favourable trading terms in view of the tough terms with the US.
Q) Could you list the key risk the market may face over the next 6-12 months?
A) Key risk for Indian markets over the next 6-12 months are political uncertainty emerging from outcomes in state elections, rising crude oil prices, depreciating rupee-dollar and a full-blown trade war among countries globally.
Q) Infosys and Tata Consultancy Services have come out with their results. What is your outlook on the sector and which one is a preferred buy?
A) Both Infosys and TCS continue to deliver robust earnings on a large base. The sector as a whole is poised to be one of the top performing sectors in FY19. Our optimism is based on the strong client additions the sector is seeing in areas which have been delivering double-digit growth. Industrial automation and financial services continue to be the front-runners for growth. Both TCS and Infosys would continue to do well over the next 12 months. We have no clear favourite between the two.
Q) Many largecaps propelled the Nifty to 11,000 levels. Which stocks will drive the next 1,000-point rally?
A) Without getting into specific names of companies, the next leg of the rally will be driven by companies which offer consistency in earnings and valuation comfort. In a year of several uncertainties, investors would not want to throw their money at high beta overvalued companies, which lack earnings growth.
Q) Any sector which could be a dark horse in 2018?
A) The IT sector could be one of the dark horse sectors for 2018. Domestic consumption-oriented sectors could be another contender for the dark horse sector of 2018.