SBI Life Insurance Chief Investment Officer Gopikrishna Shenoy believes that the Indian equity market looks more attractive than debt. He is overweight on automobiles, consumer discretionary, capital goods & engineering, defence, utilities and building materials. Excerpts of an interaction:

Which of the Indian markets — debt or equity — look more attractive for 2018? Why?

In the last three years, Nifty has given returns CAGR of 7.6 per cent, compared to the composite bond index returns of 8.9 per cent.

The recent uptrend in CPI (last reported at 4.88 per cent) and improving growth outlook (last reported GDP at 6.3 per cent), have reduced the likelihood of an interest rate cut in the near future. Oil prices inching up have added to debt market woes. Improving growth outlook in terms of earnings would make equity markets look relatively attractive.

How is your equity portfolio divided between large-, mid- and small-caps? Why? Will there be any change in the equity mix?

Seventy-nine per cent of our equity portfolio (22 per cent of total assets under management worth ₹1.1 lakh crore) is in large-caps. We like large-caps on account of transparency and governance. It has also to do with controlling risk for a portfolio.

Twenty-one per cent of our portfolio is in mid-caps. We continue to be selective in our mid-cap investments. Mid-caps showing strong earnings potential continue to be our preferred investments.

What is your view on Indian equity markets for 2018?

We have seen earnings picking up and this quarter has seen more upgrades than downgrades in stocks. The quality of earnings has also shown improvement across the spectrum. Earnings growth is expected to be in excess of 15 per cent for the next two years. We should see equity markets trend higher as this plays out.

Are you bothered about Gujarat elections’ outcome from the markets perspective?

Not really. We see Gujarat elections as a precursor to what policies can be adopted by the government.

Which are your favourite sectors and what is least preferred? Why?

We are playing consumption themes such as Make in India, retail and construction. We are overweight on automobiles, consumer discretionary, capital goods & engineering, defence, utilities and building materials. We have been underweight on telecom, IT services and PSU banks.

What are the global and domestic risks and opportunities?

Global risks emerge out of crude oil prices moving up sharply and global liquidity drying with the US Fed unwinding its balance sheet. US tax reforms could result in dollar strengthening. Rate hikes in the US and other parts of the world would unwind the carry trade.

Domestic risk to market, especially mid-caps, is continuity in strong domestic inflows in case market corrects sharply. Some State elections in 2018 and results of Gujarat State election will add to volatility.

Improving global growth would benefit domestic exporters. GST-led efficiency gain is clearly helping companies shore up earnings. More savings in the form of financial assets is a big opportunity.

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