Mid universe is 6-7x bigger than largecap which offers better stock picks

We might not see the kind of outperformance that the midcap stocks delivered compared to largecaps over the last 3-4 years, but there will be certain pockets within the midcap segment that could give handsome returns, Prasanna Pathak, Fund Manager, Taurus Mutual Fund, said in an exclusive interview with Moneycontrol’s Kshitij Anand.

What is your index target for the financial year 2019? Do you think the index will be able to reclaim 12,000 on Nifty and Sensex could rise above its previous record high of 36,443?

Very difficult to answer the question as your guess will be as good as mine. The market cycles are getting compressed and volatility is increasing. Also, the situation both domestically and globally tends to change dramatically within months.

The only green-shoot for our markets is that the earnings seem to be back after a long hiatus. This was the missing link in the entire euphoria for the last 3-4 years.

We expect the earnings momentum to accelerate going ahead unless there are further unforeseen events. Also, the elections being near, the government will try its best to get capex and growth back into the economy.

The ongoing correction thus provides a good opportunity to buy in the midst of pessimism and noise.

Which sectors are likely to hog the limelight in the coming financial year and why?

We believe that revival of growth and buoyancy in the US economy should translate into good prospects for the IT sector.

The revival in earnings growth may not be adequately captured in some of this zero-debt reasonably valued companies. Also, companies leveraged to the rural economy and agri-sector should do well.

Do you see Modi 2.0 as a possibility as we inch closer to national elections in the year 2019?

One year is big enough time in politics. We will have to wait and watch how the situation unfolds.

Mid and Smallcaps which hogged the limelight in FY18, do you think the trend will continue in the next financial year? If yes, why?

We might not see the kind of outperformance which the midcap stocks delivered vis-a-vis largecaps over the last 3-4 years. However, there will be certain pockets within the midcap segment which will outperform handsomely.

If you look at the last 3-4 years, there are many midcaps and smallcap companies where prices have soared multi-folds without corresponding increase in earnings.

The markets have given them the benefit of demonetisation, GST disruptions, etc. The expectations are high with respect to earnings growth and going ahead some of these companies may disappoint. The room for error is low in such cases and one needs to be cautious.

However, there are some pockets where the expectations on earnings growth are low and there might be a positive surprise. Case in point is IT mid-cap companies. The revival in earnings growth may not be adequately captured in some of these zero-debt reasonably valued companies.

The mid-cap/smallcap universe is 6-7 times bigger as compared to the largecap space, which offers better stock picking opportunities even in the slightly stretched scenario.

What should be the portfolio composition of investors in the coming financial year assuming he is in the age bracket of 35-40 years?

Of the incremental savings, 30-40 percent should go towards safety to a combination of Bank FD, Liquid and Arbitrage schemes of Mutual Funds. 20-30 percent should go towards moderate safety with better return potential to a combination of options like income schemes, balanced schemes, and Gold.

The remaining portion (30 percent) should go towards equity schemes of Mutual Funds (diversified across the large cap, mid-cap, and small cap).

The portfolio composition will change based on individual’s risk appetite, income levels, commitments, and liabilities etc. One must visit a certified financial advisor for specific allocation advise.

Do you think earnings are likely to bounce back in double digits in FY19?

The recent quarter results have been quite encouraging on the earnings front. We do expect the broad-based earnings to accelerate going ahead.

How should investors play PSU banks in FY19 given that we are seeing new frauds from different banks almost on a daily basis?

There is a lot of pessimism surrounding PSU banks currently. A majority of it is already reflected in prices. The market cap of some of the PSU banks is significantly lower than the 1 year-trailing core earnings.

The incremental NPA issues should subside at some point in time. Some of the new frauds being discussed now were already a part of stressed assets and in some cases were well-provided for.

Also, NCLT resolutions starting from April onwards may lead to some relief. So, for brave and contra investors this space should offer good nibbling opportunities. For others, it is best to wait for the tide to subside and clarity to appear.

How will fears of trade wars likely to play out for Indian markets in FY19? Which sectors are likely to see the worst of it?

The tariff-war should hurt China and other net-exporting economies more than India. Shifting manufacturing base out of China and back to the US may lead to more outsourcing opportunities for India.

Also, if India too decides to protect its turf, it should relatively benefit us as we are a net importer of goods. This will then benefit the domestic manufacturing sector.

However, this is not as simplistic as it appears. Also, one will have to wait and watch as to how the retaliation and negotiations happen going ahead to get a clearer picture.moneycontrol

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