What are your thoughts on the valuations vs earnings narrative in this rally?
Most analysts and market participants thought that FY21 earnings will decline because of lockdown, but it grew quite substantially. The earnings growth was a big surprise. In FY22 also, the earnings growth expectation continues to be quite strong.
On the valuation side, most parameters are slightly closer to the upper end of the band. So in that sense, markets are priced pretty much to perfection.
The global central banks have infused tremendous amount of liquidity. Now with the commodity prices also going up, inflation will start showing up. That is when some of the excess liquidity will be taken away and interest rates will start moving up. It is worrisome to think how PE multiples will behave in that scenario.
How have you structured your portfolios right now?
We have been liking IT and pharmaceutical sectors for quite some time and we continue to like them. We have been tilted more towards export-oriented companies which could see good demand. Apart from that, we have also been preferring manufacturing export-oriented companies. Within financials, we like the top three private sector banks. Despite the slowdown, these banks have maintained asset quality. These are the sectors where we are overweight.
What is your positioning in the broader market because the rally seems to be bigger there?
Nowadays, sectoral rotation is happening in a full-fledged way. Wherever stocks are priced relatively low to their earnings or the price-to-book value is low, they are performing quite well. Till about a year ago, only a few select high quality and high growth companies were performing well. But in the recent rally, value is also participating. Companies that are priced closer to the replacement costs have also started performing quite well. Most sectors are participating in this rally. The rally is quite broad-based and it has percolated to the value segment as well now.
