Here are 4 pockets of value for investors right now: Ashwini Agarwal, Ashmore Investments

With attractive valuations and earnings growth, I am optimistic about 2019, say Agarwal.

We are starting to see earnings growth come through and if the trend sustains, then valuations and earnings growth will determine the direction of the market rather than politics, Ashwini Agarwal, Co-founder, Ashmore Investment, tells ET Now. Agarwal sees value in banks, domestic industrial demand, cement and healthcare sectors.

Edited excerpts:


Exactly a week ago, everything was on our side. Crude had collapsed, Fed had changed stance, flows were back but today it looks like it is bad news all over again?

We are going through a scenario where the fear is essentially politics which is more of a short-term sentiment than anything else. If you analyse the mood of the voters, it would be premature to extend what happens at the state level to the general elections. Obviously, the market is reacting to the exit polls that came out on Friday post market.


Crude oil has jumped up a little bit and that is causing some concern as well. But in the short run, it is essentially politics that is driving the sentiment down. I personally do not worry too much about it because of multiple reasons; number one is if you do a past analysis starting 1989 till today, stability of the government -- whether it is a coalition or a majority government -- has not really determined market returns.

Second is the core economy is doing quite well. We are starting to see earnings growth come through and if that trend sustains, then valuations and earnings growth will determine the direction of the market rather than politics.

Last but not the least, I do not think we can forecast what happens at the state into the centre so easily. Voters have started to think differently about these two elections.

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As we roll over from 2018 to 2019, all the brokerages are making a case of a 15 to 25% recovery. With consumption also starting to slow down, is it hard to make a case for earnings recovery?

That’s a great point but the November data have to be analysed with two issues; number one is NBFCs obviously got hit very hard in terms of availability of finances and they are preferring to conserve liquidity at this point rather than give out loans. That would have an impact on auto demand in particular.

Second thing is that Diwali last year was in October and this year was in November and that tends to move things around a little bit vis-a-vis year-on-year numbers or even month-on-month numbers. Typically, during Diwali a lot of construction workers go home for three or four days or five days leading to a lull in construction activity.

We have to look at this data on a two, three-month basis before concluding that the economy is indeed slowing down. Having said this, the second half of the current financial year will see slower growth as compared to the first half of this financial year purely due to base effect.

In the first half of this year, we had a base effect of first quarter of GST being introduced on 1st July last year so sales in the first quarter of last financial were low and in the second quarter of the last financial year, many companies were dealing with the GST implementation and one might surmise that things were a little bit slower. On a year-on-year basis, the first half was quite strong. We do not see any tailwind in the second half. But if I look into the financing issue, the banks are stepping up and that is great news.
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Till now, most of the NBFCs seem to have enough liquidity to meet their short- term needs and as the system normalises and he banks start to lend more, the availability of finance on consumption may not be such a big constraint. At the margin, it might affect a few borrowers who are unable to borrow from the banking system because of sectoral limits or because of specific prohibitions or whatever it is but outside of that, I do not really see such a big impact.

We have to see the data for another couple of months before concluding that the economy is significantly slowing down. I am taking the November numbers with a bit of a pinch of salt.
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From a return expectation, what should investors brace for in 2019?

In the first half of 2019, we may not see a significant upside because people will wait to see what happens in the general elections. There will be a lot of noise around various issues. The market might bounce around here or there, not doing too much but the key to the market outlook is the earnings growth trajectory.

If look at Nifty earnings, everybody started out with 22-23% earnings growth expectations but in the first two quarters, it has already been trimmed down. Most of the issues that led to the trimming down were transient such as high energy prices, high input costs on materials etc. These are not there in the second half.

If you actually see an earnings growth of something like 12-15% getting delivered this year compared to negligible growth rates for the last three years, that should provide a shot in the arm for the marketplace.

Second, midcap valuations were very extended in CY2017. The midcap indices are down quite significantly this year varying from 25% to 33% depending upon which index you are looking at and valuations are quite compelling.

I agree that midcap returns require risk appetite to return. Maybe, it is the second half 2019 story rather than first half, but my experience tells me that whenever valuations become very attractive, earnings growth is decent. It is a great time to be buying. The political noise will be there but we will become accustomed to assuming the earnings growth story it delivers. If that happens, then I would not worry too much about 2019 being another dog year like 2018. I am actually more optimistic about 2019 at this point in time.

So valuations are attractive and earnings growth is relatively stable. What pockets of the market do you believe these two factors are sitting in well?

We like the domestic banks.You are seeing a significant reduction in credit cost for the banking system. Across the private banks, the private industry lenders and across the PSU banks, you will see a significant reduction in credit cost going into FY20. Bulk of the credit costs are probably behind us. You will see significant earnings growth there. That is an area where we are very positive about.

The other area is the domestic industrial demand. If you look at the recent earnings reports from a lot of the industrial equipment manufacturers, you will find that the numbers surprise positively for the September quarter and the order books are looking quite strong. Similarly. domestic construction order books are also looking quite decent. The domestic industry overall is looking quite reasonable.

The third area where value investment can be made is the cement sector. Sentiment is completely crushed here but if you look at the profitability on a per tonne basis, it is at a level at which no new capacity can be created. New capacity additions in the current financial year are likely to be significantly lower than what was forecast at the start of the year. Capacity utilisation should pick up as we go through the year and that is bound to result in pricing power six to nine months from now. That is another area where things are looking quite interesting.

Healthcare stocks are quite cheap across the board and I think one has to cherry pick based on what one is comfortable with. But that is another area where we find a reasonable amount of value at this point in time. There are a large number of sectors where I think valuations are very reasonable, earnings outlook is improving and those are the areas one should be looking at. This is in addition to the small and midcap names where across-the-board valuations are now looking very attractive relative to the growth.

You are bullish on the economy. If you are bullish on earnings, if you are bullish on cement, utilisations and capacity to pick up, then why not simply go and buy metal? High beta names in metal stocks like Tata Steel, Vedanta have been beaten down. If you get them right, you may end up making 15-20-25% in just a jiffy.

Yes you are right. There might be some very nice trading opportunities in the metal names that you spoke about. Unfortunately metals have a lot more determinants for their outlook compared to cement which tends to be a more a domestic industry where the factors are much more forecastable.

In metals, I am not certain as to what is happening on the global demand scenario and over a period of time I have personally learnt just to ignore the metals because they are just far too many determinants into those stories. They present trading opportunities from time to time and here might be some very decent short-term trading upside available there, but unfortunately I do not really spend a lot of my time studying this sector because of the volatility and unpredictability. Unfortunately I am not able to offer any insight there.

When we look back and remember that the early patch of September and in October beginning, during the NBFC selloff, those who kept their calm and invested sensibly, have emerged as winners. Who will be rewarded now-- greedy stock pickers or the realistic cash hunters?

I do not know what happens in short term. In the short term, there will be political noise and there will be a lot of speculation surrounding change of government and what happens and what does not happen and so on and so forth. If you buy stocks when they are attractively valued from companies that have a history of delivering on their promises. where balance sheets are not stretched and where cash flows in their history have remained reasonably encouraging and they do not have a corporate governance concern, you can find a lot of small can and midcap stories, even largecap ones where valuations are quite attractive.

In the medium term, I would define medium term as one year plus and you will be rewarded. My personal view is that it might be too late to raise cash and sit on cash at this point in time that was of course in hindsight something that one should have done at the start of this year or late last year. But it does not seem sensible to do at that point of in time.

Short term, I do not know what is going to happen. Three-six months are extremely hard to predict. The global environment is in a complete flux. The US-China trade war fears which had subsided at the start of last week have again resurfaced. If there is a global event that leads to a massive risk off, I just cannot predict and that is a risk that all of us run while investing in the market. I prefer to look a little bit beyond a couple of quarters. That is the only way one can make reasonable investments.

How would you look at the consumption story right now? It is coming at a price but it is really the safeguard measure to protect against volatility that we could be facing into 2019. Do you think that when it comes to the India story, consumer staples and discretionaries can never disappoint?

Well staples the underlying demand is of course very long term and sustainable in nature but valuations are quite challenging. I was looking at the price earnings band for a lot of the consumer staples companies last week and several of them are trading at all-time highs. All-time high is going back into 15 years, 20 years in terms of valuation ranges.

Clearly that trade has done well. It is very well played out and in hindsight, in any market selloff it is the quality and predictability that gets a premium and which is why the consumer staples stocks have done so well this year. We are value investors and we find it very difficult to convince ourselves to buy consumer staple names which might be trading at 50 times or 60 times historic earnings with an earnings growth which is somewhere in the region of 15% or 18%, when I can buy similar earnings growth stories at 12 times or 10 times or 14 times earnings and this is more true for the staples rather than for the discretionary demand products.

On the discretionary demand side, we are seeing some opportunities where stocks have corrected 30-40%. Yes there are some headwinds to near term outlook but there are very well managed companies over the long run and this is another area where the domestic consumer will sustain and continue to grow over a long period of time so these look interesting to us.

It is not a one size fits all but yes there are some consumer discretionary plays which look interesting.

What would be your strategy when it comes to autos? , earnings are in a bit of flux but then again correction has been seen?

Yes. Autos have been correcting for the last three or four months and growth numbers have not been very encouraging. This is more of a base effect. Auto sales have been growing for three or four years and now there is a base effect catch up in some of the leading consumer auto names. That is why you are seeing the correction in stock prices. My sense is that some of them which are down 25-30% are starting to look quite attractive.

We do not own many autos at this point in time. Towards the end of last year, beginning this year they had become quite expensive and expectations were quite stretched both on sales as well as on margins. We are quite pleased to see the correction that has come through. We are looking at several of these names and a couple might look interesting at some point. At this point not really very sure whether it is the time to jump in but yes they are beginning to look interesting.
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