“Midcap segment is extremely expensive and that is something we will wait out and see how it plays out,” says Aniruddha Naha, PGIM India.

What do you make of the market setup? A lot of stocks have corrected because the headline index is down 10% from highs, but if you look at a lot of midcap and smallcap names, they have easily corrected between 20% to 40%. Are a lot of these names coming into your buy territory now or still waiting for some more correction?
Aniruddha Naha: We have generally been positive on the small and microcap space. I mean, that is the space where we believe a lot of stocks have corrected and it gives you reasonable amount of earnings growth coming through in that space followed by the largecap where we believe there is some amount of more correction due probably because this will be the third quarter where the frontline companies will disappoint on earnings. The last two quarters have been pretty suboptimal in the sense the earnings were below 10%, I think so this quarter will be no different and hence from that perspective this will be a good time to build portfolios in the largecap and small and microcap segment. Midcap segment is extremely expensive and that is something we will wait out and see how it plays out.

Do you think this year is going to be an outperformance coming in from the broader markets? Will the largecaps take centre stage because the FII selling still continues?
Aniruddha Naha: Finally, your returns are a slave of what kind of earnings the markets deliver. If the portfolios deliver good earnings, your portfolio will do well. Generally, this quarter and probably the next quarter also the earnings will remain reasonably subdued. Government spending should start coming back and that will hopefully drive some of the sectors up. But what we are telling investors, please use the next six-nine months to build portfolios. Do not expect very high returns.

The returns even into the next couple of quarters will be zero to 10%. So, it will be a single digit kind of return that one can expect. But it will be a great time to go ahead and pick good businesses where because of the near-term earnings disappointment, it will give you an opportunity to build portfolios around those companies.

Since everything boils down to earnings, which are the pockets you believe might show a bit of outperformance when it comes to the earnings growth? Which are the ones which will lead the earnings growth and deliver better than average returns?
Aniruddha Naha: Private sector banks, after a long time, though the earnings might not be anything great in terms of growth, but it will not disappoint and that itself is a positive. Secondly, rural India should start coming back. Water tables are good. MSP prices are high. Earnings beside MGNREGA has also started doing well.

So, anything related to the ecosystem in rural India should start reflecting some amount of positivity. But the broader view is it is going to be a stock-pickers market and hence, people or fund houses who are able to build good, strong portfolios of about 30-40 stocks around good businesses with reasonable amount of earning strength, they should easily outperform the benchmarks and hence, active management will definitely come back vis-a-vis the passives which have done well over the last two-three years.

Could you talk to us about which are the segments that you have increased your positions on? What is your cash level right now? Are you fully deployed or have you started deploying a lot more?
Aniruddha Naha: On the alternate side, we have been running 10-15% cash level across. We are positive on pharma, healthcare, rural, agri, and probably private sector banks to a certain extent.

But in terms of pockets, frankly speaking, other than the agri-rural part of India, we have become very-very stock-specific. Agri-rural, the only reason why we think as a basket would still do well because the sector has just not participated or this segment of the market has just not participated in the last couple of years and hence, there could be some basket approach there, but otherwise it has to be very-very stock-specific in terms of what we go ahead and build.

As we kick-start earnings today with the IT name, TCS is going to come out with its earnings today, what is your take on the IT basket? Now, it has held fort even when the markets were down. It has moved up quite a bit, but what do you expect from the earnings now that attrition and wage hike problems have abated? Are there any currency tailwinds that you see further? And also, what is your take on the earnings and is this time where people will start taking profit in the IT names?
Aniruddha Naha: Generally, our positioning, since you asked, is we have got literally very low positioning or a reasonably large underweight on IT. Stocks have done well, especially in the midcap and smallcap segment, we find them extremely expensive. If someone has to probably take a position, the largecap positioning probably would give you far higher comfort in terms of valuations, but otherwise, mid and smallcap IT names look reasonably priced to perfection. Any disappointment could actually see corrections out there.

So, probably, if someone has to be in IT, it would be a rejig from the small and midcap to the largecap segment, otherwise can we go ahead and build portfolios beyond IT? Absolutely possible.

But one space which has been underperforming massively has been the chemical basket and for a reason, but finally, do you see light at the end of the tunnel and are you getting incrementally positive on some of the speciality chemicals?
Aniruddha Naha: So, this is something that we have been debating internally. There is no doubt that the inventory level, channel checks, etc, shows that inventory levels have come off and hence it should be a reasonably big opportunity. What the Indian markets are also betting on is that China will not be incrementally very aggressive. But from what we see on the Chinese economy side, there is a reasonable amount of slowdown which is reflected in their currency, their markets, and their bond yields. And if that is the case, they will continue to produce and export deflation outside.

And I do not think there is going to be any difference in their thought process with chemicals also. The kind of chemical capacities that they have built up, they might just continue to do that. I think a lot of the chemical trade over a longer period will depend on how China behaves, what is the kind of discipline it maintains. But in the near term, yes, since inventory levels are lower, this sector might continue to give you a couple of quarters of good results going ahead.