Equities could return 8-10% in the next 12 months, said Rahul Singh, chief investment officer, equities, Tata Mutual Fund. In a chat with Prashant Mahesh, Singh said investors should be overweight on midand small caps now after their underperformance since January 2018. Edited excerpts:

What will be the impact of the tensions between the US and Iran on Indian markets?
It is very difficult to predict where this rift between the two countries is headed as of now. Unlike the Saudi Aramco drone attack, where the increase in crude price was momentary, if this geopolitical tension continues, crude prices could remain high. High crude prices hurt the Indian economy. All markets — be it equity, fixed income or forex — could be affected.

The Nifty is near its all-time high but earnings growth continues to remain elusive. What is the big risk to the market this year?
In real estate and NBFCs, the situation is delicate though there has been an considerable improvement over the last 3-4 months. However, it will take atleast 2-3 years for the real estate inventory to be absorbed. Many NBFCs have managed to get funding and the awareness within the government on this matter is high. Banks are reducing their lending to NBFCs but not totally withdrawing.

Indian market’s gains were polarised in the last one year led by a handful of stocks from the Nifty. How are you looking at this space?

Within the Nifty itself there is a huge diversion, with the top 10-15 stocks having expensive valuations. We are looking at a 8-10% return from a 12-month perspective. However, in the last couple of years, valuations in midcaps have corrected sharply. In 2017, they were at a premium of 40% to Nifty and now they are at a discount of 10%. Last time, we saw this kind of discount was in 2010. Given where we are, I do not see midcaps underperforming largecaps anymore and it is time for investors to add them. In our multicap fund, where we had an 83% allocation to largecaps, we have brought it down to 78% now by increasing midcaps.

Where should investors allocate their money now?

Investors should be overweight mid, smallcap and value strategies. Assuming an investor wants to allocate [funds] to equity, he should put 10% in smallcaps, 20% in midcaps and 20-25% in value with the balance 50% spread across multicap and large-cap strategies.

When could earnings growth come back?

GDP growth came down in two phases: first, due to demonetisation it came down from 7% to 6%. It came down from 6% to 4.5% only because of the funding squeeze and risk aversion and we are seeing some signs of things settling down there. Risk aversion has not gone down totally; the government and the RBI have become vigilant by trying not to have any accidents and have a hands-on approach to manage the whole situation. The good news is that monsoon is good, which will help rural India. From a recovery point of view, June quarter will give signals of an economic recovery.

Various analysts have lowered their earnings estimate by 13-14% since the start of the year. Given this when numbers come out for December or March quarter, there will not be much of a disappointment. Though earnings growth can be 20% for the next year, it is optical because of the high growth of corporate banks. However, our core earnings growth will be in the range of 10-12%.

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