After a strong 25 per cent plus rise in 2017, the equity markets are up only about 2 per cent in the first six months of 2018 amid bouts of volatility. Swati Kulkarni, Executive Vice-President and Fund Manager at UTI AMC, expects the volatility to continue. She also expects sustainable recovery to take more time. Excerpts:

Your view on equity markets for the rest of the year...

The rise in oil prices has an adverse impact on the current account deficit, and with interest rates tightening in major developed economies, flows also may not be as supportive, putting pressure on the currency. Therefore, for the equity markets it is pertinent that earnings growth remains strong. The volatility in 2017 was unusually low; we should now be prepared for heightened volatility in 2018.

What are the positive and negative triggers, going ahead?

Positive triggers could flow from the Government’s focus on roads, normal monsoon, operating leverage benefits and improving earnings growth. The market sentiment could turn negative if oil prices stay elevated, important State elections go against the incumbents, and if earnings growth falters.

What strategy have you adopted in the last six months in terms of market capitalisation (large-, mid-caps) and sectors? Why?

We have been cautious on the valuation gap among the large-, mid- and small-cap stocks for the past year. Even if you look at valuations, excluding the loss making mid- and small-cap companies in the respective indices, mid- and small-cap indices would still be at 10 per cent premium valuation compared to that of large-cap indices, which used to be at a discount for a considerable period in the past.

Will we finally see a sustainable recovery this fiscal?

We believe an underlying strong investment cycle supported by private capital expenditure, coupled with strong consumption support, can lead to sustainable recovery in earnings. With current capacity utilisation at 75 per cent, we think a sustainable recovery may still be a couple of years away.

Which sectors do you think will not be able to pass on the cost hikes amid rise in commodity prices, especially crude oil?

Global cyclical sectors, such as metals, oil and gas and auto sub-sectors, such as two wheelers and commercial vehicles where competitive intensity is relatively high, may find it difficult to pass on the raw material price inflation till demand strengthens.

Which are your favourite sectors and which sectors don’t you like?

We are overweight on information technology because the medium-term growth could be better than the near-term growth, margins could remain firm from automation benefits and currency tailwind and valuations are still reasonable. The overweight on consumer discretionary is on the expectation of steady earnings growth coming from domestic demand potential, rising affordability and aspiration and low consumer leverage.

We are also overweight on industrial manufacturing sector where we believe the benefits of operating leverage could boost earnings.

We are underweight on consumer staples (high valuations), and global cyclical sectors (highly volatile earnings). While we remain overweight on private retail and corporate-oriented banks and NBFCs due to strong growth, we are underweight on PSU banks.

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