Naveen Kulkarni, who has over 10 years of experience in the capital market, is of the view that managing the sector rotation has been a challenge but investors who have managed to take risks when most have been fearful have made the most.
Kulkarni who is the Chief Investment Officer, Axis Securities is of the view that we have not seen a major earnings upgrade cycle for a very long period but it seems more likely than ever that we are set for a good cycle, he said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpts:
Q) What a ride it has been for the bulls – both Sensex and Nifty50 climbed crucial psychological levels after the Budget 2021. What is the way ahead of markets?
A) The market rally has been much stronger than expectations. Valuations have become expensive but the operating metrics across companies have started looking better.
However, some degree of caution needs to be exercised as the markets could take a breather and areas where there is exuberance could correct.
We believe that the market has breached the psychological thresholds and should see some consolidation.
Q) The underlying assumption in the equity market is a recovery in the economy. We are seeing some green shoots in the economy but do you see any risks to the ongoing rally both local and global?
A) Yes, there are green shoots in the economy but the challenges are largely from global inflation and its impact on liquidity worldwide.
The central banks and governments have pumped a lot of liquidity into the system through various forms of stimulus.
As the demand scenario normalizes (which it has), supply-side pressures will mount which combined with the liquidity in the system could lead to inflationary pressures.
At present, the central bankers around the world believe that they have the tools to manage inflation, but even then, the markets could be set for a bumpy ride.
Q) The December earnings seasons cemented the fact that recovery is underway. Data suggests that over 70% of the Nifty companies that have reported earnings in Jan’21 have beaten estimates. Do you see more upgrades to the earnings cycle than downgrades which was he trend for the past few years?
A) We have seen healthy upgrades across sectors and the upgrades seen for the banking sector is more critical.
As the economic cycle gathers traction, more upgrades are likely to be seen and BFSI will remain the key sector in the forthcoming quarters.
Q) Common argument which is given is premium valuations are sustainable in light of economic and earnings upcycle. Earnings upgrades would support and drive valuations. Do you agree?
A) We have not seen a major earnings upgrade cycle for a very long period but it seems more likely than ever that we are set for a good cycle.
The reasons are quite simple actually 1) we saw a significant downgrade in earnings on account of covid19, 2) Base was quite low even before COVID19 because of sluggish GDP growth rate, and 3) Economic growth rate is gathering traction on a low base and pent up demand.
All these are factors of a strong earnings revival. As earnings revive, valuations that appear optically high will start seeing some compression.
Q) So where are opportunities in the market are which investors can grab post Budget 2021?
A) BFSI has turned out to be a significant opportunity post results and the budget. Building materials and infrastructure are now seeing good traction.
Also, earnings visibility is improving for the industrials sector. This will gain traction in the forthcoming quarters.
Q) Retail investors have consistently pulled out money from MF and January was no exception but SIPs continue. What does the trend suggests – does it mean that retail investors who can manage money are using the trading channels to route the money or there is a larger trust issue?
A) Retail investor response has been a mixed bag. They have booked profits at various levels in mutual funds and have also directed money in direct equity as they have managed to buy quality stocks at various levels.
Also, retail investors during the lockdown had more time to manage their money and that trend is continuing. We believe this trend will subside and flows into MFs are likely to come back as markets consolidate.
Q) How should investors invest money – go the SIP way or make a diversified portfolio of 15-20 stocks or a mix of both to take leverage of growth push seen in the economy?
A) SIP in stocks is a good way forward for a lot of investors but investors will need to devote some time to watch the portfolios. Another simple MF route is a good way to participate in the equity markets
Q) Sensex climbed historic levels of 52000 while Nifty50 broke above 15400 – how do you chart your journey in markets and any instance which you would like to share with your readers when you got stuck but eventually got through?
A) The journey to 15000 NIFTY has brought quite a few learnings and it has been a major catch for us with the market. However, major learning will still be that market gives a lot of opportunities in any circumstance.
When the market corrected significantly, the food and Pharma stocks delivered. Then pent up demand in the auto sector and then rally in mid and small caps and finally the BFSI rally.
All these rallies have been very strong and beaten expectations. So, managing the sector rotation has been a challenge but the investors who have managed to take risks when most have been fearful have made the most.
Q) Your checklist to investors on how to pick stocks in 2021 or post COVID as the pandemic changed a lot of things, the way business work, the metrics etc.
A) The checklist to pick stocks in any scenario remains the same:
• Earnings growth
• Business strength
• Management quality
• Balance sheet quality
• Return ratios
• And lastly, the macro outlook for the sector helps to time the sector.
All these factors will help in delivering solid returns, irrespective of the scenario.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
