Home Market Sunil Subramaniam of Sundaram Mutual on why largecaps will outperform midcaps

Sunil Subramaniam of Sundaram Mutual on why largecaps will outperform midcaps

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Sunil Subramaniam, CEO, Sundaram Mutual Fund, says most mutual funds have 60% of portfolio in defensive stocks and 40% in aggressives. He was talking to ET Now.

Edited excerpts:

Do you think largecaps will outperform midcaps?

Yes, the reason is that there is selling from FIIs side and naturally this selling is happening on largecaps. So, mutual funds will buy what is available, good quality companies on sale. It is a matter of what is available for sale.

Second, in the midcap space, a lot of momentum-based stocks have seen a lot of correction and naturally there will not be much buying in those stocks. If we see stocks which are more closely linked to the Indian economy in terms of capital goods suppliers and those with sound order books, then you will continue to see buying by mutual funds in quality midcap stocks.

How do you think the markets are responding to the uncertainty in the run-up to the elections and the macros being impacted by crude?

Basically, there is a polarisation. From the international side, there are two things –heightened political uncertainty on account of trade and tariff. Second, there is heightened interest rate volatility because of the economic recovery and the inflation rising in the developed economies.

At the same time, GDP growth is going up. Overall, the world economy is trending up. At the same time, domestically, there is the same polarisation. Political uncertainty is high because the Karnataka election outcome was not so favourable for the NDA government. There are two or three more state elections where BJP is the incumbent party in power. There is a chance that their position could get weakened. Domestically also, the political uncertainty factor has scaled up but two other strong factors are countering this. The economic footprint is coming through very strongly especially consumption, consumer durables and auto sectors are doing well in terms of earnings growth. Plus, mutual fund flows continue to remain strong.

As a result, mutual funds are able to buy stocks that they have already identified. That is why you see the market is volatile but with a flattish trend.

Will earnings growth be a key driver for markets?

Absolutely. Because of all of these earnings growth which is coming out, the footprint is very nice despite the fact that that private sector capex has not started yet. Within the next two years, as private sector capex also starts, we will see green field announcements coming through. As they get implemented on the ground, you will get a further boost to the economy from the capital goods sector. So, for the next two years, the outlook definitely is looking pretty good on the economy front.

Tactically, what are you bullish on right now?

Tactically, if you look at it, most mutual funds and ours included have polarised the portfolios in a 60-40 ratio towards defensives versus aggressives. The 60% of the defensives would consist of consumption especially consumer durables. There would be rural regulated things because monsoon outlook is good. The government spending is also going to be on the rural side. So that is the second component and the third component would focus around IT sector because the weakening of the rupee versus the dollar plus revival of the advanced countries GDP augurs well for the IT sector. So, the defensive component would comprise these, consumption with a durable tilt including retail financing companies; IT as well as broader rural space.

On the aggressive side, for next three to five years, we would be looking more at capital goods, EPC contractors, cyclicals and stocks which today are not in favour in the market but represents a good quality buying because we see earnings growth from that segment over the next two to three years as against 20% to 25% per annum.

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