In an interview with ET Now, Jyotivardhan Jaipuria, Veda Investment . says rural recovery and infra are two themes which they have been playing for the last few months and will continue to bet on them in 2018.
How are you feeling about approaching 2018 given 2017's returns? A large part of the market is optimistic about 2018 but will the road ahead be as easy?
Yes, 2017 turned out to be a great year. We had a huge return of 30% plus in the market. I do not think 2018 will be a year which will give similar sort of returns. Returns will be much more muted than what we saw in 2017. I am hoping that we end up with a low double digit sort of return, may be a high single digit sort of return for the year but there will be lot more volatility than we saw this year. This was a very smooth year where we had a positive index practically every month. There are lot of factors where one can see that 2018 could be a little bit of a wake-up call for investors.
What do you think is going to be causing the volatility? Do you think there is also in addition changing macroeconomic dynamics which was not the case so far? Crude price is already above $65 and if it inches closer to $70, that is going to be a big worry and concern for us. You have got deteriorating IIP data, pressure of crude prices as well as food inflation on the CPI numbers as well and just yesterday the GST data came out, showing a significant dip in tax collections. Would that also add to the niggling factors?
Yes. Like you said, I would spell out four factors which are cause of worry. The first one like you said was the macro so I think inflation is going up and we have seen like the best of interest rate cuts behind us. Probably we are headed for stable interest rates next year with no cut likely. May be at some point, people will start worrying whether we are going to get a hike in interest rates. That is one cause of worry.
Second, globally, we are going to have rising interest rates in the US plus a shrinkage of the balance sheet in the US which is probably going to start causing some concerns.
Third, the valuations are high and there is no denying that valuations at this stage are not comfortable.
Fourth, what worries me a bit is complacency, We had a market which has done very well for the last three-four years. So buying every dip has worked for the investors and when there is too much complacency in the market there is always a worry that people are not ready for the market which probably goes down and does not go up as quickly as they have been used to.
There are factors which you have to be worry on the positive side. The earning cycle has still not taken off and that still gives me hope that we could probably still wrap up next year with a small positive return though not as good as 2017 because you will have a phase of good earnings growth for the next three-four quarters.
What would be the average number on earnings for FY19? FY18 hope is lost on earnings revival. I do not know how much the last three months can change the outlook and even if we did about 10-11% or whereabouts, would that set the stage for FY19 because that is where many are expecting the big bump up to happen?
We have to remember that there is maximum four quarters which have a very low base. Two of them were low because of the DeMo and two of them because of the GST. So, at least on a year on year basis, even the December quarter will look very good because we are at a very low base. The next few quarters will look good. I think on FY19 we should be looking at a 15% plus earnings growth. We may or may not go to 20% because the commodity cycle may not be as strong as it has been and that has helped earnings but probably a 15% earnings growth will be good because we have on an average a low single digit growth over the last five years, That will indicate we are moving up in the earnings cycle.
What is going to be the texture of the market in the coming months because a lot of people are now betting on a big rural recovery which is going to be at play. Do you know anything to do with the consumption themes, autos, or for that matter some of the PSBs and smaller corporate banks as well which are the ones in focus? Do you also believe that perhaps a rural recovery playing out is going to be the broad theme that the market is going to be excited about?
In the last few months, we have been betting on two themes and we have not really changed our mind. One has been the rural recovery and it is something which we have been talking about for the last four-five months. From now right up to the elections, rural will be the focus for the government. The monsoons have been fairly good. We will see MSP prices getting increased much more than what we saw in the first half of the government's tenure. To that extent, rural India will do well over the next 12-18 months.
The second theme has been infrastructure which sounds like a strange theme to play because the private capex is not going to pick up for the next two years also but there are pockets in infrastructure where the government is spending lots of money and everything linked to government spending is doing well. This is a sector which again the market has ignored in a way. Most people are underweight on this sector and because of that we are going to see interest coming back into the sector. There will be lot of companies with huge operating leverage which will play out over the next 12-18 months. So, broadly, these are the two themes which we have been playing for the last few months and I will continue to bet in them for 2018.
Outline to us where do you see the opportunity for an alpha in the coming year sector wise? Here is how the market has done in 2017 — the quality stocks have outperformed and they continue to outperform but they come at a price and the undervalued infrastructure stories are underperforming but a large part of the market has still not picked up. Where do you think will be more of the same and the outperformance continue their run or will the underperformers rise?
Yes, I think it will be a mix of both so we probably are going to see some infrastructure companies or capital goods companies do well and that has been the one area where things will pick up. As we move into 2018, people will be looking at 2019 post elections and buying stocks. That is one area which will do very well. The other area is probably a bit of the same you will probably have auto stocks, agro chemicals stocks, stocks related to the rural economy do well. The one sector which one should watch out for is the IT because that has done very badly over the last 12-18 months and it is something which most people do not own. It is under owned sector which has underperformed a lot. But if we see a turn in the US economy plus if we see dollar strengthening, then that is one sector which could surprise in the up simply because it has got ignored by everybody.
What do you expect from the upcoming budget? The market is going with the assumption that it will be all about pushing the rural economy and increase infrastructure spending. Do you believe the same?
That will be the thrust of the budget. The rural economy will be the biggest focus and then infrastructure because they have to pump prime the economy. Just remember this budget is like the first budget after GST and to that extent, in terms of taxation there is not going to be too much because at least the GST part is decided by the GST Council.
The one thing which people will be a bit apprehensive about and will be watching for is this capital gains whether there is a change to the long term capital gains on equity or that remains the same. The hope is that it remains the same but as we see the runup to the budget, we will probably have that fear coming back that there could be an attempt to tax capital gains or at least change the one near two-three years.
What is the key strategy that you are stepping into the New Year with? Are there any sector avoids at this time or is it more buy of the same strategy? Would the HDFC Banks and Marutis of the world continue to do well?
Yes. Our big focus has been on infrastructure, capital goods which is benefiting from the government spend and that is one area which like we are hugely overweight on. The other one is the rural economy which we like but apart from that, we are into private sector banks just like everybody else and we are sitting on a bit of cash hoping that we get a bit of opportunity to deploy over the end of first quarter of next year.
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