Are we too frothy? Are we ripe for a big correction? How are you analysing things on the valuation front and the various fundamentals?
We continue to remain bullish on the markets and the reasons are simple. There is ample liquidity in the market and that too at overall benign interest rates. Our assumption is that in case there is a tightening, it would be gradual and that will give ample time to the markets to end up taking this into account. When liquidity is there, it has to have a reason associated with it and that reason has been consistently given by the reforms that the government has done.
It has ensured that interventions are brought in at crucial points of time. In fact, today’s RBI policy is a precursor of what is supposed to come about. They have ended up taking care of the contact-intensive sectors. They are continuing with efforts to make sure that the economy gets back in shape.
The last factor will be the effect of the first two — liquidity and reforms. Earnings over the last two quarters and going into next year will continuously keep improving and it will beat estimates that we have given at this point of time. Liquidity driven rallies typically cannot end up getting questioned and that is why markets will keep rallying because there does not seem to be a way of arresting it now. Fundamentals typically catch up with liquidity because a situation emerges where as liquidity increases, earnings catch up over a period of time as the economy opens up. Our belief is that there is ample time for it to continue to go up.
Are you quite confident of the next 6 to 12 months going forward? What is the feedback you are gathering from corporate India?
We have a fairly large resurge which ends up interacting both for institutional clients and on the retail side. In case of the contact-intensive sectors, our analysts believe that the pickup will start once the lockdown ends and the pent-up demand that is there thanks to the lockdown will start coming in and there will be a flurry of activities which will cover up the losses that have happened in the first couple of quarters.
There are also regular segments, whose balance sheets will continue to grow stronger because liquidity is available at cheap rates. An AAA rated company will get unbelievable interest rates because most of the banks are flushed with liquidity and they want to give it to the borrowers who have a track record. Even within the MSME and SME sectors, which have been largely impacted have, there are portions which are different. So there are leaders in midcaps which have performed well. But in case of the weaker ones, the merger and acquisition opportunities have opened up. People are willing to end up selling and moving down.
So a strong company with a strong balance sheet and the capability to borrow, has an ample chance of growing the balance sheet by curtailing costs over the last one-one and a half years. Cost-cutting has ensured the focus on the top line and that is where we expect a huge recovery leading to earnings growth.
A top line growth will also directly add to the bottom line over a period of time because of these controlled costs. It will continue to be a good market to invest in. One should stick to leaders in the midcap space in the next couple of quarters. We believe that is the way to play the markets over the next one-one and a half years.
Are you comfortable about the earnings growth corporate India is likely to show from here on? Are you comfortable with the market valuations in different pockets and sectors? What kind of valuations, earnings and the returns could be made in the next two-three years?
Our research desk says we will continue growing at 17-18% CAGR. It is way higher than what we have anticipated in the past and the reasons for that are simple. There is a pent-up demand but it is more the cost control measures in the last one-one and a half years and the liquidity pool that is going to continue — will drive earnings to a large extent. Returns are going to be way higher than what happened in the past. It will continue to remain strong and it is a market to be invested in.
Unfortunately when a market runs ahead of its fundamentals, the fear factor also increases to that extent. If one is sceptical about it, the risk appetite is less, then the portfolio should be hedged. The juice in the markets is going to continue for a lot more time. Conservative players can consider hedging as a strategy.
We see scope in a lot of sectors. Scope has arisen in the real estate sector which gives a large impetus to associated sectors like building materials, pipes, paints, cement, home improvement. We believe there is scope in that life insurance is a sector that we believe in. Look at cash utility companies, brokerages and intermediaries in the space. One could end up looking at the demat companies and exchanges which are listed. One can end up building a portfolio which can give extraordinary returns, especially above nominal GDP returns that we are expecting over a period of time.
Remain bullish. One needs to have a conviction in the economy rather than look at the valuations. Whatever valuations are there, have happened for a reason. Money has gone and rerated the well-run companies. It has rerated companies with strong balance sheets and companies which have the capacity to borrow for fresh growth.
What risks should an investor bear in mind while enjoying those returns?
One cannot only talk about the positives that have happened in the markets. Valuations are high, Right now, the market has run up thanks to liquidity. In case it gets pulled out, there will be corrections in the bull rally. But our anticipation is that there will be a gradual withdrawal of this liquidity in the system. It is not going to happen immediately or for the next nine to 12 months at least.
Liquidity is going to continue because right now the economy has not bounced back totally either globally or in India. So, confidence has to be built so that one has the time frame to ride the rally through. If you are conservative, hedge your portfolios. There are ample opportunities to go back to your advisors and learn how ro hedge your portfolios. The only fear factor that remains is the liquidity pullout which is still some time away.
