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Sunil Subramaniam on how to tweak your portfolio ahead of 2019 elections

In an interview with ET Now, Sunil Subramaniam, CEO, Sundara..

In an interview with ET Now, Sunil Subramaniam, CEO, Sundaram Mutual Fund talks about the earnings expectations, impact of elections on markets and the NPA mess. Edited excerpts:

ET Now: How are you mapping the trends on earnings because it is a rolling cycle right now? Expectation is that in FY19, earnings will finally increase, how likely is it?

Sunil Subramaniam: Well, the current state of market is political uncertainty combined with economic certainty. So whats happening is that both globally and domestically you are seeing economic footprints. The monsoon outlook is good, IIP inflation was reasonable and monsoon inflation should then be under control.

Then the IIP numbers and demand numbers have come in strongly and so is the case internationally too. There is political uncertainty around Syria and US going Russia, China and Korea but the economic footprint in America, Europe and Japan is still looking extremely positive and strong. So from the earnings perspective this economic certainty will lead to a robust earning season.

We expect the largecap earnings to grow by 17% to 18%, midcap earnings by 20% to 22% and smallcap earnings by about 23% to 25% this year and this will be in terms of portfolio allocation.

The earnings season is also important for us as we look for the guidance for current year which will help us reallocate portfolios. The major political event for markets will be the Karnataka Elections and towards the end of May we will get a lot more clarity on the political side based on results.

ET Now: What is your market range or direction in the wake of political uncertainty?

Sunil Subramaniam: A plus or minus 500 points on the Nifty is probably the range that we will see over the next three to six months.

ET Now: What according to you is the scenario that can derail markets right now? The possibilities working in market circles is that Modi would come back with majority; BJP comes back with 210 to 215 odd seats and may need a coalition, then who becomes Prime Minister is the question and the third scenario that nobody wants to talk about yet because it is not pretty much on the fore is a change of government. How do you look at those scenarios working in with your own call on how the market would behave?

Sunil Subramaniam: There is a fourth scenario which you have not mentioned and that is an advancement of elections to November of this year, which I think is a real situation the government is evaluating.

ET Now: It was because the rumour mills were active in the market. Since you have mentioned it now, what do you think would be the markets reaction?

Sunil Subramaniam: An early election scenario is a very positive sign for markets because it indicates Modi government's confidence that they can actually win and carry forward with majority. And remember that regardless of whichever scenario operates, the current government will have a Rajya Sabha majority same time next year, thanks to that two-year rotation policy.

The other three possibilities that you mentioned – the first being Modi coming back to power, is a slam-dunk, so it is not an issue. The second scenario is the coalition and other is a non-BJP government in power. So, obviously the market will become sensitive and will react to it but from the earnings season perspective, I do not think it could have any impact.

The portfolio perspective of the two scenarios of Mr Modi not coming back to power with resounding majority or comfortable majority would mean that portfolios would shift to short term as opposed to long term. Why I am saying this is because in short term the populism will kick in. There would obviously be pre-election polls which will indicate the ground reality and if they are not so strong for the Modi government then you will see the government shifting its focus from infrastructure and road building to populist schemes like increasing allocation of funds to MNREGA, food subsidy, fertiliser subsidy and all of that.

So this would give a short-term pop to the consumption and rural sector and normally this happens every election year. The short term consumption numbers will look very robust and as fund manager I would allocate a greater proportion of portfolio to short term.

If the scenario is looking good for Mr Modi coming back to power, then we would expect the renewed thrust on infrastructure, affordable housing and road lying. All of these are long term things and then our portfolio would automatically tilt towards infra, building materials, and capital goods. So we would see highly polarised portfolios based on how the election outcomes look like.

ET Now: What are your expectations from the earnings season? Are there any dark horses who could surprise on the upside?

Sunil Subramaniam: From the earnings perspective we have moved from underweight to neutral on FMCG because earlier we were little bit concerned about the valuations, we were expecting growth which was not looking justified three months ago. But today we think that the actual FMCG numbers are going to come out fairly strong and robust, and therefore we have changed our stance. So FMCG is the sector that will surprise us on the upside term.

ET Now: What do you find more attractive about FMCG at current valuations, is it more the urban related theme or more the rural focussed plays?

Sunil Subramaniam: We expect the earnings in the urban related theme to be strong but it will be the rural related theme that will drive the earnings from valuation and future growth perspective. The quarterly results we expect from the urban side of the sector are surprising positively but our call in terms of the portfolio allocation is more driven by the rural consumption story for the next six to nine months.

ET Now: When can we finally bank on banks to say – this is it and no more of the bad loan mess? Can you give us a time line on how bad things can get before they get better?

Sunil Subramaniam: We think that the worst of the NPA general recognition is behind us, so except for some surprises because we will see a lot of NPAs which are economic cycle driven, we believe the bank sector will turn around and will post better numbers. So barring any of the surprises that may come up we think the worst is behind us.

But at the same time the NPA issues not is about reporting, it is also about recognition and what you are going to do with what is already recognised. We think that it is high time RBI comes in and sets up the mechanism for the public sector banks to get more robust, may be merge some banks to get a few big solid banks in play and also may be pull out the toxic assets into a bad bank so to speak. So then the investors who would like to take these turn around bets can participate and take them out of the regular banking cycle. We believe this will happen because economic recovery cannot happen without the banking system supporting it. It is of paramount importance and that is why we believe we are hearning news of RBI trying to relax the norms for the banks.

ET Now: Do you think that come the summer months ahead of the monsoons we could be higher record highs once again for the markets?

Sunil Subramaniam: If the Karnataka result goes well, then absolutely new highs are on the cards.

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