“If we look at the traditional parameters i.e. P/E ratio, the market looks expensive as profits are likely to drop in FY21. GDP growth for FY21 will be negative at -8 percent or even lower and FY22 growth may just about bring the GDP to FY20 levels. However, since the base for FY21 will be low, the profit growth for FY22 will look good,” Mihir Vora, the Director and Chief Investment Officer at Max Life Insurance said in an interview to Moneycontrol’s Sunil Shankar Matkar.
Q: How should be the allocation mix in equity now considering a sharp rally in mid and small caps? Should fund managers increase bet on these stocks or should play safe with higher allocation to largecap stocks?
A: Mid and Small-caps tend to do well in bullish or ‘normal’ times. However, since they are typically short of resources compared to larger companies, they also represent higher financial and operational risks. The correction in midcaps since 2018 has been very sharp and deep. Midcaps gave up almost 7 years of outperformance versus largecaps in the past 2 years and hence they still have a long way to catch up. Even in absolute terms, the midcap index is at March 2017 levels. So, in terms of valuations and relative performance, midcaps are still attractive and there is good scope for stock-picking. However, it needs a continuation of the benign monetary and fiscal measures.
One of the advantages of smaller companies is that they are the only segment where the ‘new’ or ’emerging’ sectors are represented. For example, let’s analyze the current attractive themes viz. Electronics manufacturing, Chemicals and Pharmaceuticals manufacturing, Make-in-India, Defence indigenization etc. Many companies in these segments are midcaps and are not represented well in the largecap indices.
The other thing to consider is that segments which have come under stress due to the pandemic, viz. hotels, restaurants, malls, airlines, multiplexes, highly discretionary spending etc. are also all represented by midcaps. As the economy recovers, these midcap segments may outperform.
Q: As we are focussing more on Atmanirbhar Bharat, what are sectors one should invest in as a part of equity portfolio and why?
A: The Make-in-India theme encompasses a wide gamut of initiatives, including import reduction and export promotion. While the initial thrust was to create growth and employment, it started getting traction due to the US-China trade frictions. Multinational companies started looking at alternate sourcing bases for exports. In this phase, while India did get some business, the bulk of the benefit went to countries like Vietnam, Thailand, Indonesia, Malaysia etc. The Government has declared packages for Electronics, Pharmaceutical sectors, and I believe that many sectors like Consumer Durables (AC, Fridges etc), Chemicals, Defence manufacturing etc. will get direct, indirect incentives in addition to tariff & non-tariff barriers.
Q: Lot of brokerages are tying up with global investing firms to offer their customers an investment opportunity in global stocks like Google, Amazon, Apple etc. What are your thoughts on this theme and how much percentage one should allocate to global stocks in a portfolio? What are risks one should consider before investing in global stocks?
A: As a principle, I agree with global diversification of one’s portfolio. Since many of us will have foreign-currency expenses (education abroad, travel & tourism etc.), it makes sense to have some foreign-currency exposure. However, as of now, most asset classes look expensive due to the sharp run-up that we have seen across the world in most assets. So if you are considering building a global portfolio, I would recommend a gradual build-up over the next few years. Moreover, instead of trying to pick stocks, active or passively-managed funds or ETFs may be a better bet.
Q: Also what are the biggest risks ahead on the global as well as domestic front given more than 50 percent rally from March lows in equity? Do you think the market has to correct now given the over 50 percent rally seen from March lows or will the market continue its uptrend, why?
A: The biggest risks are in valuations of the largecaps and the polarization of the market into the top 10-20 stocks. If we look at the traditional parameters i.e. P/E ratio, the market looks expensive as profits are likely to drop in FY21. GDP growth for FY21 will be negative at -8 percent or even lower and FY22 growth may just about bring the GDP to FY20 levels. However, since the base for FY21 will be low, the profit growth for FY22 will look good.
The key drivers for the market are the flood of global liquidity, near-zero interest rates and massive fiscal stimulus in the developed world. The way markets and all asset classes have moved up in the past 3 months, it is clear that markets are expecting a continuation of these policies. With such liquidity flooding markets, it gives us the luxury to look beyond the immediate future i.e. FY21 and focus beyond i.e. FY22. If the economy recovers back next year, then profit growth will be sharp and valuations based on expected FY22 earnings may be justified to some extent.
While the stock market has seen a V-shaped recovery, the improvement in the underlying economy is slower. Even before the pandemic, India had growth issues, so a V-shaped recovery for India is unlikely as India has used much less fiscal measures to stimulate growth compared to the developed countries, which are likely to bounce back much faster.
So in the short-term, markets will remain volatile due to a clash of two massive forces i.e. the pandemic-linked sharp slowdown & uncertainty on one side and the massive policy actions by Governments and Central Banks to keep markets and economy afloat on the on the other side. I would be more comfortable if the market consolidates at these levels for some time, otherwise the risks of a sharp correction increase.
Q: Auto has seen a sharp run up in the last few months following monthly sales data amid unlock process and June quarter numbers. Should one invest in auto now or wait for correction, why?
A: Auto as a segment is likely to turn around quickly because transportation is a basic need. However, the way stocks have already moved up, the valuation comfort is not as good as it was a couple of months back.
Q: FIIs’ monthly inflow in August 2020 has been the highest in last two decades? What does it indicate given the current scenario and government measures? And what are those sectors/segments getting more FII investment?
A: Given the huge impact of the COVID shock, it is imperative that central banks as well as governments continue with the liquidity and fiscal support. As of now it looks like the accommodative stance will continue in the foreseeable future and real interest rates will be zero and even stay negative for a long time – this is usually a signal for asset price inflation. We are seeing this increase in prices of all assets, whether it is equities, bonds, precious metals and even crypto currencies like Bitcoin. Markets are expecting the liquidity creation to continue. Emerging markets have underperformed the developed markets so far.
In a liquidity-led chase for returns, we typically see rotation into underperforming asset classes. So there is a case for increased flows to emerging markets and India is relatively still the more exciting of the emerging economies given the strong consumption base and increase in companies seeking investment avenues outside China. So far, the flows that India has received are in line with global flows to other markets too. A good proportion of the flows are into ETFs, which are passive in nature. Thus it looks like largecaps will continue to get a bulk of the FII flows.
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