‘This market is very expensive in some pockets, dirt cheap in some, and the belly of the market is reasonably valued.’
Sanjay Kumar Singh listens in.
Even as the Nifty 50 has soared from its March 23, 2020 low of 7,610 to 14,347, its trailing price-to-earnings (P/E) ratio has skyrocketed from 17.15 to 39.45.
Many investors today are worried that after this run-up, the markets have turned expensive and could be poised for a major correction.
The bulls, however, argue that the market is being driven by the flush of liquidity that has been injected by central banks and governments and through both monetary and fiscal routes.
These policies, they say, are unlikely to be reversed anytime soon.
Another oft-heard argument in favour of staying put is that the P/E ratio has got distorted by the fact that earnings are low currently.
But as earnings growth revives, stretched P/E values will revert to more normal levels.
The bears argue that the markets are close to a tipping point and any adverse news could see them correct.
They say the hopes of earnings revival have been belied many times over the past few years, so why should it be different this time?
If you too are caught in a quandary between greed (staying put in anticipation of higher gains) and fear (you believe a correction is imminent and hence you should exit), read on.
Prashant Jain, Sankaran Naren, Nilesh Shah, and Anoop Bhaskar offer their views on the markets and advice on the way forward.
“This market is very expensive in some pockets and dirt cheap in others. Be patient”
It is tempting to make a case for being underweight equities after what has undoubtedly been a big move and especially when that’s what the majority seems to believe and would like to hear.
One could also say phrases like “good time to take some money off the table”, “cautiously optimistic”, “constructive in the long term”, etc. but then investment in equities ideally is not for those who want to hedge their bets.
Being optimistic on equities now also exposes me to the allegation that I was positive pre-Covid, during Covid and post-Covid! But that is what I feel and that is what I am going to share.
For all the pain that came with Covid, there was a fair share of gains too for the Indian economy.
For starters, low oil prices are likely to save about $25 billion in FY21 and India is likely to be current account positive after 16 years.
The push that Covid gave to the shift of manufacturing away from China has the potential to improve India’s GDP growth by 1-2 per cent per annum for many years.
India is not leaving any stone unturned in trying to capitalise on this large opportunity.
The Production Linked Incentive scheme, tweaking of tariffs, large domestic market (unlike many other comparable Asian nations), competitive costs, improving ease of doing business ranking (from 142 to 63 with a target of 50) could enable India to carve out a strong position in global manufacturing.
And the icing on the cake is the tsunami of liquidity at never seen before rates both locally and globally.
This has propelled the affordability of homes in India and there is finally hope for the perpetually capital-starved infrastructure sector.
Equities are slaves not just of earnings, as Warren Buffett famously remarked, but also of the cost of capital.
Every 1 per cent lower cost of capital increases the fair value by around 10 per cent.
Seen in this light, equities in India are not as expensive as some believe.
Besides, the averages hide more than they reveal.
The current market is a good example: While the Sensex in end-December 2020 is at around 2.3 times its December 2007 levels, the FMCG index is at 4.7x while the PSU index is at only 0.6x, and others are in between.
The divergence in sector valuations is near an all-time high.
This market, in my opinion, is very expensive in some pockets, dirt cheap in some, and the belly of the market is reasonably valued.
One more way to sense this is that the 10 and 15yr compounded annual growth rate of the Nifty 50 are 10 per cent and 12.6 per cent respectively vs nominal GDP growth of around 10-12 per cent over this period.
In conclusion, while markets in the near term are always hard to forecast (at least post the 2020 experience), in my judgement, patience in equities could be rewarded over time.
Given the excessive debt, unsustainably low interest rates and the elevated valuations in Developed Markets (DMs), as and when interest rates in DMs move up, there is a risk of equities sell-off there and this could trigger a correction here as well.
One should be prepared to ride out such occurrences, as many did in 2008.
“Investing during a new normal calls for prudent asset allocation”
Indian equity markets have rallied continuously since March 2020 fuelled by the global liquidity unleashed by the developed world central banks.
As a result, equity valuations have turned expensive.
However, when viewed in the context of the prevailing low interest-rate scenario, equity market valuations do not come across as very expensive.
The elevated valuations are likely to persist till the time inflation starts rising in the US and the Fed withdraws liquidity.
Therefore, we believe adhering to asset allocation, by way of spreading investments across equity, debt, gold etc. becomes absolutely important.
One of the ways you can achieve a sound asset allocation is by investing in dynamically managed asset allocation schemes which tend to gain from market volatility.
Such products allow the investor to participate in the market rally through equity allocation while the presence of debt limits downside to the portfolio.
Those looking to invest in equity schemes can consider investing in funds with a value bias.
Despite the rally, there are pockets of opportunities available providing good dividend yield coupled with better earnings visibility.
The other investment which investors can consider is to invest in funds which take a call based on the economic macros, which is where a business cycle-based fund comes in.
At the same time, in a low interest rate environment, small and mid-cap companies stand to benefit the most on account of low cost of capital.
In the quarters ahead, as the profitability of fundamentally strong companies improves, this will get reflected in the stock price in the medium term.
So, for an investor who is ready to stay put for the next five years, investing into broader markets through the SIP route is another investment opportunity.
“Use a true-to-label balanced advantage fund”
Equity markets witnessed a raging bear and bull market in a roller coaster ride in 2020.
Flows (record buying by foreign portfolio investors and retail investors), sentiments (fall in the number of active Covid cases and rising economic activities) and earnings (highest quarterly profits in September 2020 quarter) supported a Very-shaped recovery.
While flows and sentiments are fickle, fundamentals provide strong support to the market.
The bulls believe that earnings momentum will sustain in 2021 as despite a 7 per cent drop in sales in the Sept 2020 quarter, Nifty50 companies posted a 17 per cent year-on-year growth in profit after tax (PAT).
The bears believe that cost cuts helped achieve a one-time spurt in PAT.
Markets are discounting that earnings will sustain in 2021 if vaccination allows normalcy of economic activities to be restored.
Retail investors must maintain a disciplined asset allocation, especially towards equities.
Valuations in March gave them an opportunity to be overweight in equities.
The current valuations require equal-weight allocation to equities.
If an investor doesn’t want to carry the burden of allocation, then investment in an Asset Allocator Fund or a true-to-label Balanced Advantage Fund will be appropriate.
‘Keep a close eye on earnings trajectory’
After a dismal 2019-20, the markets are primed for a strong revival in earnings.
The trajectory of earnings growth will be the most critical factor that will influence the markets, as valuations, boosted by benign monetary and fiscal policies, are at an elevated level.
Due to the pandemic and the lockdown during the June 2019 quarter, earnings were downgraded sharply for 2020-21.
GDP estimates forecasted 10 per cent and even 15 per cent de-growth.
However, the swifter-than-expected economic recovery led to a more robust September quarter.
Upgrades then exceeded downgrades three times, a rarity, after years of earnings disappointment.
Estimates for 2020-21 rebounded quickly from negative to positive territory, despite the debacle of the first quarter.
However, 2021-22 and beyond is what investors are playing for now.
In the past, the track record for forecasting two-year forward earnings growth has been poor, with actual earnings coming in lower by 25-30 per cent.
Currently, estimates for 2022-23 appear to be building growth rates higher than the peak growth achieved in any period during the 2013-19 phase across sectors.
Pockets of value are available in four buckets.
The first is PSU stocks, comprising banks, refiners, metals, mining, and heavy engineering companies.
The second is corporate lending focused and mid-sized banks.
The third is cyclical sectors, including industrials, automobiles and auto ancillaries, and metals and commodity companies.
The last bucket is small caps.
If the economic recovery is robust and the RBI does not move aggressively into a high real interest zone, small caps could benefit the most.
This was reflected in the market recovery after a sharp fall in 2009 (global financial crisis), 2014 (general elections), and 2017 (post demonetisation) as well.
- MONEY TIPS
Feature Presentation: Aslam Hunani/Rediff.com
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