Stocks to buy: Volatility fallout: Pharma & FMCG may be back in favour

“We would want to continue to have a more balanced approach but we like a few sectors in terms of financials and IT for our portfolios,”says Prasun Gajri, CIO, .

How are you assessing the markets right now?
We believe that choppiness or volatility is something we will have to get used to as we have been in the last few months now. The recovery in the market is premised on a few things. One of which is that the growth comes back and right on this year, the earnings trajectory should follow and we are anticipating a fairly good earnings growth in FY2022 and strong growth to follow in FY2023.

Along with this, the basic premise also is the fact that interest rates basically remain benign and so these are the premises on which the market has risen. Anytime one of these assumptions get challenged, the markets will go through a volume trading phase. For example, if the Covid cases have risen, that could have an impact on growth and therefore the market is jittery. If interest rates rise, that could have an impact on the basic assumption the market is making in which case, the market would again get jittery.

Given the way the valuations are reasonably elevated at this point of time, whenever we see any of these phases, the markets are going to get jittery. Having said that, the growth this year is going to be fairly good and the earning trajectory is going to look strong over the next few quarters. We do not believe any of this volatility is going to lead to a large scale sell off but at the same time, we will have to get used to it. I do not think it is going to be a one-way street as we have seen over the last few months of the last calendar year when the market just went up one- way for a few months. That phase is over now. As and when the assumptions get challenged, we will see a volatile phase and it will be more of a consolidation phase for sometime till we get a very clear idea on how these assumptions are going to play out as we go along. That is the way we are looking at the markets at this juncture.

Are there any themes or baskets that you feel are still trading at relatively lower valuations and which investors should be looking at?
It is more of a relative play now. I do not think there is any absolute level of undervaluation left in most of the stocks. Even the beaten down stocks have gone up now. I am not saying they have become expensive but have clearly risen from the bottom levels but from a sectoral perspective, we continue to like the financial space. That seems to be a good space both from valuation and a growth perspective over the next two years.

We also continue to like a space like IT where we believe the growth can actually surprise on the upside but overall we still believe that it is the time to play a more balanced portfolio because sector rotation has been the theme. Our sense is that some of the defensive sectors like pharma and FMCG which have not performed could come again into play if this volatility remains the way it is. We would want to continue to have a more balanced approach but we like a few sectors in terms of financials and IT at the margin for our portfolios.

In the last one year, the midcap index has given a 100% returns whereas Nifty has 75% gains. Midcaps are said to be correcting the underperformance of the last three years. How do you view the midcap space right now?
I do not see a big re-rating happening in midcaps anymore. If you look at any sector, if you pick and choose the stocks which are at higher valuations, some of the midcaps are actually at higher valuations than the large caps in any particular sector. So there could be some room for play here but I believe the larger part of the game has been played. Also remember that in this phase, we have seen the larger companies performing better in terms of numbers. The stronger players have grown only stronger. One will have to wait and watch how things really play out especially for the smaller midcaps. The larger midcaps are really doing fine. I am not of the view that there is much room left for further outperformance. At this juncture, given the valuations, I would be biased towards large caps and midcaps.

Where do you stand on the consumption theme?
Our view has been that this entire pandemic phase may have led to some sort of a demand impact. We have seen a fairly sharp demand pull back. How much of that is structural, how much of that is just driven by pent-up demand? The jury is still out. Our belief is that especially on discretionary consumption, the valuations are moving sharply upwards. At this juncture, at the margin we would be a little bit cautious on the space.

I believe consumption continues to be a good long-term theme for the Indian markets but maybe at the margin one would have to be little bit cautious about playing this theme, given the valuations and given the fact that we are still not sure how strong the recovery is going to be over the next 12 months as far as the consumption is concerned. So wait and watch. We want to maintain a balanced approach and it is not that we are getting out of the consumption themes. It is just that maybe we will not be adding incrementally more as we had in the past.

Source Link