What did you make of RBI commentary, especially clues for ample liquidity in the system and also on growth?
The central government as well as RBI have maintained their pro-growth stance and are not putting any particular limit to the timeframe for continuing to support the economy or growth. They are saying till the time a significant sustainable growth is achieved, we will be supportive of the economy, I think RBI’s stance continues to be accommodative. There are lots of positives in terms of the liquidity measures although the rate stance was as market expected. It is overall positive for the growth outlook of the economy.
How are you analysing the kind of early Q4 operational updates that have poured in across sectors, lenders, realty companies and metal companies? Does it give any kind of red herring for this quarter? What are your thoughts on the upcoming earning season?
A few of the large companies have given updates and they seem to be pointing to a positive direction. In the last two quarters’ results — September as well as December — we have seen upgrades coming in. Globally we are seeing higher upgrades than downgrade and the same continues for India. Last May we were projecting a zero percent growth in Nifty earnings and now we are talking about 20% earnings for the full year of FY21. So the direction is positive. I expect some positive surprises coming in this quarter too.
Initial numbers show industrial and real estate sectors are likely to give a positive surprise. I myself am quite bullish about the infra and the capex space. This is one space where we are in the opposite of a bubble — sort of an anti bubble — which has not performed for many years. There have been some false tones that people have not believed, including pick up in the capex story in the country. This is where expectations are low and initial positive surprises are high, while valuations are quite reasonable. This is a space to watch out for in the coming years.
You believe that the fear in the market or in the economy in general that the second wave could stifle growth once again, does not have merit. Why do you have that view and what makes you believe that the recovery is much more durable?
I believe that the second Covid wave will create more sentimental impact than fundamental impact and this is based on a few assumptions or signs that I am seeing right now. One, the lockdowns are likely to be more selective in terms of places and states and also are likely to be for a shorter period of time. The intensity of these lockdowns is also less severe than what we have experienced last year. According to last year’s experience, we see a certain pent up demand that covers up for these lockdowns or the loss of business.
I believe that on a full year basis, the growth projection will not be affected much. In fact, investors who are looking for 3-5-year estimates for growth, there will not be much change. Also we cannot ignore the aggressive pace at which we are vaccinating people, at least the vulnerable section of the society which is the senior citizens as well as people with comorbidities. I believe we crossed about 8 crore vaccinations yesterday and we are growing at a aggressive pace.
The government wants to increase the pace of this vaccination and get a significant percentage of the vulnerable population vaccinated very soon. I believe that though there may be a certain sentimental impact on markets based on the second wave, there would not be much fundamental impact.
Let us talk about the broader market which is doing relatively better than large caps. What kind of themes are you researching? What are you overweight on as far as some of the schemes are concerned?
We are positive on four themes — the return of inflation, the rise of manufacturing, rural growth and the rise of housing. We are bullish on these four themes and companies that fall within these themes are likely to have a positive tailwind and are likely to do well over the next three to five years.
In terms of market capital categorisation we are bullish on midcaps and small caps which have recently started outperforming large caps by a good margin. I believe that will continue as the economy recovers, as we see more upgrades and as we see more broadening of the recovery in the business cycle.
In terms of the sectors that we are bullish on, we like the cyclical sectors which are financials, industrials and materials. These fit into our overall theme and also we see a lot of good tailwind within these sectors. Again, some of these companies have not done well for many years and the valuations are attractive. Currently people are not expecting much from these companies so there is a positive surprise that we can get on growth. There may be growth which is under-appreciated or the valuations which deserve a rerating.
Also, regarding interest rates and yields, a lot of people believe that because interest rates are moving up, one should have a higher discounting for equities and equity valuations should peak. Historically interest rate movements vis-à-vis equity markets show that valuations do not peak at just the beginning of a rise in interest rates. In fact, the beginning of rise in interest rates actually reflects the sustainability or the confidence in the growth going forward. When growth is good, valuations also move up.
It is somewhere in the mid cycle of interest rates that price to earnings multiples peak. So at either end, where interest rates are extremely high or extremely low, the valuations do not reach their peak. The current up move in interest rates is actually a reflection of improving economic conditions and more business upgrades than downgrades in credit ratings and earnings in the equity markets.
Overall, the setup is quite positive and I am quite positive for the coming year. Last two months the market has not done well. It has been monitoring a lot of developments but we have got certain positive surprises and support from the Budget as well as from the RBI policy and from the corporate results that we are seeing.
You are making a case that the upcycle may continue for two to three years. Can you explain?
Absolutely. We are in a bull market and I believe that the economic upcycle will continue. The question is how much we have discounted and which parts of the market have discounted it more. When valuations are high in a particular sector or within particular companies, the growth of the future is already estimated or priced into their valuations. Then the investors need to be patient about those sectors. But there are many sectors where growth is not completely priced in or the valuations are reasonable. Those sectors can give an upturn to investors in those segments.
I believe we are in an upcycle for the next three years. Thematically, some of the themes have a better growth projection than the average market growth and within midcap and small caps, we see more opportunities to pick up companies which are reasonably priced and offer a good upside to investments.
