Particularly compared to last year- this year is likely to be more volatile, says Harshad Patwardhan, CIO – Equity, Edelweiss Asset Management. He also expects earnings recovery to be led by rural consumption and segments of industrials such as construction, which in turn will pull other segments up over a period of time. Edited excerpts of an interview.
With earnings recovery expected, do you see it becoming pervasive across sectors or will it be in pockets only? Where do you see opportunities?
Overall earnings growth has been lackluster for a very long time. From FY08 to FY17 Nifty EPS has compounded only at about 5-6%. We do expect growth trajectory to move up going forward. However, as EPS growth revives from the bottom of the cycle, the recovery is unlikely to be synchronous. We expect it to be led by a few segments of the economy which in turn will pull other segments up over a period of time. Rural consumption and segments of industrials such as construction will likely lead the recovery.
Rural consumption improving is a factor markets are considering. What are the factors you see driving rural consumption?
Rural consumption was under stress for a long time for various reasons but has recently been showing signs of improvement. With the renewed focus of the government on agriculture and rural sector in general, things are likely to improve further. The government has initiated various structural reforms to improve productivity and bring stability to the agricultural economy and these measures will have positive impact in the medium to long term. However, the most tangible and immediate positive impact will accrue from offering remunerative prices for agricultural produce thereby generating surpluses. At lower income levels, marginal propensity to spend is likely to be high. Besides, the recent budget makes it clear that the government’s top priorities are reviving agriculture/rural economy.
How do you see this year shaping up, especially post budget?
Apart from a rural thrust, this budget continues emphasis on infrastructure building. Both the priorities are supportive of growth. Reviving rural demand and continuing momentum in infrastructure spending will provide further tailwind to overall earnings growth trajectory. While there may be some concerns emanating from the budget for the fixed income markets; for equity markets it appears conducive. In our view, this year- particularly compared to last year- is likely to be more volatile. In that it will be a more normal year with occasional corrections unlike 2017 where markets moved up almost one way. To navigate this market successfully would require keeping emotions in check and focusing on using corrections to rebalance asset allocation if necessary.
What is the strategy you adopt for Edelweiss Equity Opportunities and Edelweiss Mid and Smallcap fund? Do you see size as an advantage in your mid-cap fund?
We are bottom up of stock pickers. Our research focus is on identifying compounding stories with strong sustainable growth over medium to long term. At this point we are also researching cyclical businesses well levered to upturn in growth cycle. This fund, as per the new nomenclature will be a large and midcap fund.
For Edelweiss Mid and Smallcap too, the core investment strategy remains the same. However, as per the mandate (and we take it very seriously), the investment universe here comprises mid and small cap companies. The key thing we focus on is to make sure that we do not go down the quality curve even as we go down the market cap curve while identifying stocks for this portfolio. In addition, liquidity of underlying stocks is critical while deciding sizing of positions in this fund. Yes, the current small size is certainly an advantage. However, we will always be very conscious of liquidity even as the size grows. As per the new nomenclature, this fund will become a midcap fund.
Fund outperformance over their benchmarks has been reducing over the past couple of years.
One can generate alpha only by taking active bets, i.e. by deviating from the benchmark. If you look at our funds, we have always maintained large active bets. Of course, at a stock level we try to accurately reflect our level of conviction in the size of the bet. While building our core portfolio we do not look at the benchmark at all. Of course, we also have a strong focus on risk control by identifying any inadvertent risk that we might be taking and mitigating it in the portfolio. So we will try to continue to generate alpha as we have done in the past.
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