By Dhiraj Sachdev, Senior Vice President and Fund Manager – Equities, HSBC Global Asset Management
The market witnessed a healthy correction since the beginning of this year, led by rise in US bond yields, Indian PSU bank governance issues, trade war related noise as well as natural correction of some of the excesses in valuations.
So how do we deal with the correction and uncertain times? By simply taking lessons from history. In the raging bull market of 2003-07 period, we had close to 13 corrections of more than 10% and all of them proved to be great investment times. Similarly we had the Lehman crisis of 2008-09 or even deflation scare/China slowdown in 2015, when our markets too corrected by about 20% in nearly four months. Similarly, in 2016, markets faced demonetisation led correction for about two months. And all of them have proved to be good investment times.
Fundamentally, while India macros may have deteriorated at the margin in terms of fiscal slippage/CAD (Current Account Deficit), the micro numbers seem to be very encouraging. Industrial and economic recovery appears to be firmly in place. The December quarter results reflected good earnings growth and we expect broader earnings growth of close to 20% p.a. over the next two years coming from a low base of demonetisation and GST, as well as led by accelerated government spending. There is again a historical perspective with respect to the pre-election period, where-in the Index of Industrial Production (IIP)/economic growth tends to improve on the back of government spending on rural agriculture and infrastructure and that should support earnings growth as well.
Besides, globally, in the medium term, with return of inflation and rising interest rates, eventually though gradually, EMs (Emerging Markets) should perform better v/s DMs (Developed Markets).
Currently global market is grappling with the trade war noise and related uncertainties. At this point of time, it is too early to talk about its probable outcome as it is in a nascent and hazy stage. Relatively, India could be a potential beneficiary. Amidst all this noise, US S&P 500 corporate earnings are expected to sustain strong earnings growth that should fundamentally support any major downside.
In India, we are also seeing credible progress under the Insolvency and Bankruptcy code (IBC) in resolving legacy NPA issues across steel, power and other sectors.
On the earnings front, March quarter could see good numbers from Auto/NBFCs, retail private banks, metals, energy and infra companies especially on the roads side of business, while private sector corporate lenders, pharma and telecom sector may report weak financial results in the near term.
As a portfolio strategy for HSBC Small Cap Fund, we have focused on companies in the agriculture sector like seeds, crop protection products, farm mechanisation products – tillers and tractors, pipes and micro irrigation systems that will benefit from greater rural and agricultural spending and expected rise in farm incomes. Besides, we like other businesses like aqua farming, specialty chemicals, NBFCs and selective companies in the engineering and infrastructure sectors where order book to bill ratio gives higher growth predictability.
Against the backdrop of recent correction and expected volatility from global markets and run-up to elections, we continue to hold and add selective opportunities in several small companies across diversified businesses that should sustain earnings growth and which are available at reasonable valuations. This strategy has potential to eventually provide alpha or above average performance to the investors.