Your is a differentiated view because you do not look at quarter to quarter, year by year kind of a lens. Your perspective is much larger and longer than many in the market. How are you looking at the construct of the market and the resilience in the face of the second wave?
The market clearly did not react too badly to the second wave. We did not see any massive fall which was a bit of a surprise but in hindsight, not so much. The recovery is coming through as far as the pandemic is concerned and the case count is falling. Hopefully, the worst of this second wave is going to be behind us over the next couple of months. The market is experiencing positive vibes in the sense that we are seeing some recovery over the last few days.
But we are trying to look a little bit beyond the current situation. The market is already building in a reasonable amount of earnings growth for the year and for FY23 as well. We are at slightly higher than long-term averages in terms of multiples. It is not very expensive but on reasonably positive earnings growth, we are at higher than long-term averages.
Broadly we remain a little bit cautious and not bearish on the market is the way I would like to put it. I am cautious because I think the impact of the second wave is yet to be fully understood. After the first wave, we had a strong recovery and a V-shaped recovery as far as consumption growth and broader economy was concerned. This wave has been very sharp and has impacted the economy for a shorter period of time but wherever the impact has been, it has been clearly intense and we are seeing some evidence that this has also spread to the interiors. We have to wait and watch how the recovery pans out this time.
Do we really see any kind of pent-up demand that we saw last time? Is it weaker this time? How is the banking situation going to look like for everyone including us? We have been building in a lower credit cost for the financial system this year. Does that change once this goes past? Those are some of the issues one has to really tackle from a market’s perspective which makes us a little bit cautious.
I believe RBI has done a good job in keeping the rates contained but can it really do so in case of inflationary pressure and the fact that the situation may not turn out to be very good and we do not have any fiscal room for any further stimulus which the government can provide. This again makes us a little bit cautious and with the inflation in US rising, the interest rates in US coming up, some talk of tapering going on, those remain global risks. But they are very difficult to pinpoint.
The momentum is strong in the market and the liquidity continues to remain good which are the positive parts. All in all, we believe that while some earning pressure could emerge this year, it may not be very significant and therefore we are little bit cautious without being bearish at this point of time. But we are not very aggressive in terms of positioning at this point of time.
We are balancing between the cyclical sectors which we expect will do well but at the same time, looking to add the more defensive sectors, the sectors which are more dependent on the global economy than the Indian economy and balancing out the portfolio. That is the way we are approaching this market given the situation.
Just a follow up question on the back of that if indeed you know the corporate earnings on aggregate grow 15% to 18% over next three years — a case the market is building in — can one be justified to expect market returns also at 15-18% CAGR for next three to five years?
The earnings will grow in high teens over the next three to four years. The market can definitely give the returns. The worry is only going to be if there is some sort of challenge to this earnings growth phenomena because of how the economy recovers, what are the long- term scars of the pandemic on the overall aggregate demand in the system and how the interest rate cycle plays out as we go along.
A lot of those issues are not fully resolved as yet. Therefore to take a call that earnings can continue to grow in high teens for the next three to four years is a little bit premature at this point. But I do not believe there is any risk in the market and one can make good long term returns in the market.
Where is it that the pricing is not fully factoring in a very good healthy earnings growth forward?
Over the next 12-18 months, the cyclical sectors of larger private sector banks will continue to do well. There could be some hiccups here and there in terms of some credit cost surprising on the downside, but broadly these banks are well capitalised. They are capturing market share and as and when the credit growth comes back, these banks are going to do fairly well.
The risk of any downturn is much lower when you are looking at the larger banks. We are very positive on the larger private sector banks as far as the cyclical sectors are concerned. On the defensive side, we are more bullish on the pharma space. That space is doing well and will continue to do well both on the domestic side as well as on the export side. We also remain reasonably positive on the IT space though this quarter was a little bit of a disappointment. The longer term growth story remains reasonably intact. The valuations are not significantly out of the long term averages and so we remain positive on both IT and pharma as far as the defensive sectors are concerned.
Apart from that, it is a little bit more stock specific and we believe the earnings can be positive but that is the way we are positioning. We are positive on some of the cyclicals like larger financials and also positive on some of the global themes and global-oriented sectors like pharma and IT. That is the way we are looking at it.
What is the rationale of your cautious stance on metals?
Metals in the context of the market is a small sector as far as the index is concerned and we are overweight on the ferrous space. We continue to like that space at the margin. Having said that, after such a long rally, there are always some concerns which arise and that is the reason we are taking a little bit more cautious stance on the metals space.
Metals has always been a trading sector and to take a very long structural call on metals is a little bit difficult from a portfolio construct point of view. We will continue to dabble, we will continue to book profits when we believe the rally has run through and in case it corrects, we could look to add metals again. It is not that we are taking a long term negative call on metals. It is just that given the rally, we have kind of come off but we continue to remain positive as far as the ferrous space is concerned. We are pretty much invested in that space.
What are your thoughts on some of the reopening sectors which the market is favourably looking at like travel and tourism, leisure, some of the travel related platforms or even hotel companies?
It is a fair assumption to make that some of these sectors will do well once the pandemic is behind us and things open up and the evidence is pretty much available from some of the countries where economies have opened up and pretty much people are moving around.
I think things will do very well once we open up. The only concern is going to be that these stocks could run up very quickly based on the opening up and then when the evidence kind of trickles in it may not be as great as what market feels to be. Currently, we remain positive on some of these names and we have some exposure but we are definitely not going significantly overweight on this theme.
It is going to be more of a slow upward grind and let us see how the evidence comes through when things open up in terms of how people react. We will take it as it comes but yes, this is one theme which could play out as and when things open up.
