Valuations looking much more attractive now: H Nemkumar, IIFL

A bear market has already set in and this trend is not changing any time soon, says H Nemkumar, head of institutional equities at IIFL. Foreign investors are in a wait and watch mode due to the impending elections and will take big asset allocation decisions after seeing the poll outcome, Nemkumar tells Rajesh Mascarenhas on the sidelines of the 10th IIFL Enterprising India Global Conference.

Edited excerpts:

Is there a long bear market coming?

The mid- and small-cap indices are already in a bear market. Even in the case of large-caps, save the top 30-40 names, stock prices have seen a sharp correction. The theme for our conference this year is 3Es—Elections, Economy and Earnings. Much will depend on what the election outcome is. As yet, we have not seen a broadbased recovery in earnings and fundamentals are not supportive enough. Investors are clinging on to a narrow universe of stocks especially those that have a better earnings momentum but valuations for this universe are too rich.


What are your foreign clients expecting from India? Are they worried about the populist measures of central and some state government?

Foreign investors are in a wait and watch mode. They would like to see the election outcome, post which big asset allocation decisions would be taken. There is no doubt investors have lingering concerns about the likely impact of populist measures recently announced by the central and state governments. A better picture will emerge once the new government is in place.

Don’t you think mid-caps have been oversold? What is your outlook for the mid- and small-cap stocks?

A large number of mid-caps and small-caps are definitely oversold. It is part of the classic boom and bust cycle. Between 2014 and 2017, a number of small- and mid-cap stocks went up multifold. Enthusiasm about a recovery in earnings led by formalisation and a broader improvement in the economy, coupled with strong flows into domestic MFs drove a sharp expansion in earnings multiples. However, investor expectations were belied as earnings momentum didn’t recover. This coincided with the waning of risk appetite and that has wreaked havoc. The overall momentum is still negative. Valuations are now looking much more attractive but with no immediate trigger in the near term, momentum will likely remain negative in the near term.

December 2018 earnings have been mixed bag so far. What is your earnings outlook for Q4?

We don’t expect any discernible change in the outlook for earnings for Q4. New pockets of risk have emerged as well. Save IT, FMCG, a few consumer durables names and private banks, earnings outlook remain clouded. For the past 6-7 years, we have been in an earnings downgrade cycle and still consensus estimates are elevated.

What are your thoughts about metals and commodity-linked stocks?

Much will depend on whether the trade war between the US and China gets resolved. China has seen a perceptible slowdown in recent months. There are a lot of expectations of a focused stimulus in China. If things start to move in the right direction and Chinese demand holds up, then metals and commodity stocks would do fine. However, investors will need to be selective in their approach.