‘Value can be found outside the index' : PRATEEK AGARWAL, HEAD-EQUITY, BHARTI AXA INVESTMENT MANAGERS

If the volatility in the market reduces, we expect to see the space outside the index perform significantly better than the indices themselves.

When markets remain range-bound, stock-picking increasingly becomes a challenge. While few sectors continue to outperform market, investors tend to move with majority and pick stocks within such sectors. In an interview with Business Line Mr Prateek Agarwal, Head-Equity, Bharti AXA Investment Managers, identifies sectors that hold potential to outperform and also sectors that lack sheen.

Healthcare and FMCG stocks outperformed the markets in the recent times. Do you anticipate the trend to continue?

In general, the healthcare and FMCG space is expensive but there can be exceptions in the mid-cap space. On account of high volatility in the market, premium was being paid for cash generating stable businesses and this benefited these sectors. As focus turns to growth, we expect this space to underperform. The pharma space also benefited on account of M&As which have taken place at valuations that are not otherwise justifiable. Hence, we believe that the chances of disappointment are high in this space.

Despite the rate hike concern, auto retail sales continue to be robust. What is your outlook for the sector?

We continue to be positive on the space. While interest rates have a bearing on the total cost of ownership, for most buyers, fuel may be a larger cost. While both of these costs may go up over the medium term, we expect sales to remain buoyant because the income levels are growing at rates faster than the increase in cost of ownership of a vehicle. One sense of increase in incomes is the growth in the nominal GDP which is running in excess of 15 per cent.

Given that mid and small-cap stocks are more sensitive to interest rates do you anticipate any slowdown in earnings due to increase in interest rate?

While mid and small cap stocks have a larger leverage than large cap stocks, and hence, may be affected more due to an increase in interest rates, they would also benefit on operating leverage. Spare capacities would be put to use as the economic growth strengthens. Hence, the mid-cap part of the market may actually deliver earnings growth in excess of the large-cap part of the market.

Residential property demand is still below the peak levels even as interest rate concerns loom large. Do you think the current valuation of the sector holds potential to deliver market return over one-two years?

We are positive on the real estate sector outlook. We are already witnessing buoyancy in absorption rates across the country and prices have moved up significantly from the bottom and volumes are sustaining at higher price levels also. While housing market has recovered, the commercial space is yet to fully recover and may take time.

However, with economic growth expected in excess of eight per cent, it is only a matter of time before the commercial space sees demand. We believe that the stocks in this space offer significant value.

After being hit by competition and regulations, telecom stocks are slowly back in action. Do you anticipate a bounce back in the sector?

The focus on the telecom sector was on account of M&A activity. While such news flow would continue to make the stocks volatile and may present trading opportunities, we believe that the competitive intensity would remain high. Hence, we believe that it may underperform the market in the near term.

Market has been range bound over the past six months, do you believe the current valuation will see fresh investment?

We believe that the valuations are now at the top end of the comfort zone, and hence, we do not expect a very significant move in the index and expect the index performance to trail the earnings growth trajectory. However, while the index is not cheap, value can be found outside of the index. If the volatility in the market reduces, we expect to see the space outside the index perform significantly better than the indices themselves.

Source: http://www.thehindubusinessline.com/iw/2010/07/25/stories/2010072550711000.htm