15 June 2015

Market valuations attractive from a medium to long-term view; 4 sectors to bet on :: economic times

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The current negative sentiment in the market is temporary and due to a combination of various factors such as the view that monetary easing is 'done for now', worries regarding sub-normal monsoon, slowdown in rural economy and disappointing corporate results.

While it is too early to comment on monsoon trends, but it does ahead of Met department prediction and not so disappointing as of now. Volatile FII flows have been creating short-term disruptions in the market. The lack of visibility on future earnings fuelled further weakens.

We are positive on the Automobile, Private sector banks, Information Technology and FMCG sectors.

Automobile Sector:

The automobile sector will benefit from falling cost of ownership (fuel and interest cost), gradual economic recovery, improvement in consumer sentiment and increase in discretionary expenditure. Historically, this sector has shown a high correlation with GDP growth. This sector will also benefit from the government's 'Make in India' plan as many auto ancillary companies derive a sizeable proportion of their revenues from exports.

Private Sector Bank:

We continue to remain positive on the private sector banking space. These banks utilized the moderate credit growth period to improve operational efficiency and productivity, build strong CASA franchise and stable asset quality by diversifying loan book.

With healthy capitalization and significant digitalization initiatives, private sector banks are well placed to capture the expected pick-up in economic growth cycle. This sector is in a sweet spot and offers high growth and strong profitability (RoEs and RoAs).

IT Sector:

We have a positive stance on the IT sector. Management commentaries and data points suggest a normal demand environment and increase in discretionary spending in the SMAC space. INR, which has been one of the strongest currencies till mid-March, has started depreciating.

This bodes well for the sector as weak INR leads to expansion in operating margins and higher EPS growth. The next two quarters (June and September) are seasonally strong quarters for this sector. This combined with the rupee tailwind augurs well for this sector's performance.

FMCG Sector:

The FMCG sector will benefit with the uptick in demand momentum led by gradual economic recovery and increase in consumer confidence. Companies in this sector have stable earnings profile, good earnings visibility and less cash flow volatility. Within the FMCG space, we are positive on companies which have higher exposure to urban areas.

We believe that corporate earnings growth cycle is close to bottoming out. Though the investment cycle is at a nascent stage, green shoots are clearly visible. Various high frequency indicators viz. PMI, manufacturing sector growth, indirect taxes and commercial vehicle sales growth suggest a gradual pick-up in the economy.

Consensus estimates a double digit growth for FY16 and FY17. Even if the earnings growth is slightly lower than estimated, we believe that current market valuations are attractive from a medium to long-term perspective.

(The author is Head Investments, PNB MetLife. Views and recommendations expressed in this section are the analysts' own and do not represent those of EconomicTimes.com.)

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