DAILY VOICE | Re-rating of cyclical stocks on cards; invest in equity funds with 5-year horizon: George H Joseph of ITI MF

Market Outlook

George Heber Joseph, CEO & CIO, ITI Mutual Fund said they are betting on the re-rating story of cyclical stocks. These look interesting from next 3-5 years investment perspective as they expect some positive factors to play out. Economic recovery could help boost earnings of these companies and a possibility of valuation re-rating.

In the short term, there is a possibility of a decent correction in light of the global cues, he said in an interview with Moneycontrol’s Kshitij Anand. Here are edited excerpts from that conversation:

Q) Indian market seems to be in a firm bull market if we look at the micro and macro data for February. But, weak global cues could be a spoiler in short term. Your advise for investors…

A) The stock market had a relentless run in the last year and needs a correction so as to have a healthy up move further. So, in the short term, there is a possibility of a decent correction in light of the global cues.

Valuation, in general, has caught up quite a bit but there are pockets of opportunities in various sectors which are linked to the domestic economy.

Cyclical sectors are still trading below the long-term averages. They had gone through massive underperformance in the last decade.

The point to note is that the earnings growth is picking up after a big gap of 12 years, corporate profits to GDP is at two-decade lows and I see a very high possibility that liquidity flow to India can continue.

So, the prospects of India are bright and I see good growth potential from a medium to long term perspective. In light of all these factors, investors should ideally invest in equity funds with a 5-year horizon in mind and buy into market dips in tranches which will enable them to ride through short-term volatility and also average their investments at lower levels.

Q) What is happening with commodities? Crude seems to be inching higher, we are seeing some action in metals as well. Do you think we are entering a commodity supercycle for the first time since 2008?

A) In Jan’20, when I gave interviews to media (Bloomberg Quint)  I had mentioned clearly that I am quite bullish on commodities and real estate sectors and also very constructive on mid & small-cap segments.

We were of the view that the China trade war issue could mellow down and commodities can do well, moreover, they were trading at very attractive valuations.

When we were mentioning this both the sectors were at multi-year lows and there was no air of respite but today things have changed and the sentiment around those sectors are positive.

I strongly believe that China’s growth is coming back to growth acceleration after a decade, India also following suit and that is the case with many Asian countries & Europe where the improvement from low growth environment post-pandemic is visible.

Moreover, most governments’ focus is shifting towards Healthcare infrastructure and other infrastructure improvement areas.

So, overall I am quite constructive on commodities as a whole and believe 2000 to 2010 can be repeated in some form during the 2020 to 2030 period.

Q) A lot of beaten-down stocks are beginning to get buyers’ attention. Any Dark Horses which investors can look at and why?

A) The Mid & Small Cap stocks in general, PSU & SME Banks, few Agri stocks, select Oil & Gas stocks are trading at a significant discount to their large-cap peers which needs attention.

Cyclical stocks re-rating is what we are playing in our funds and the above segments of the market looks interesting to bet from the next 3-5 years perspective as economic recovery led earnings growth impact and valuation re-rating are possible here.

Q) Gold also seems to be inching towards a bear market (a fall of 20% from the highs). What are your views, and what should investors do with the yellow metal – right time to deploy the money?

A) When the world growth is picking up, bond yields & inflation are also moving up equities could be the best asset class to be in and not Gold.

We have seen a similar situation in the 2003-2007 periods also when yields moved up from 3.5% to 5% in US, growth in economies was better and equities gave the best returns.

Another point to note is that people are treating Bitcoins as another mode of currency & investments which is taking away the sheen from Gold.

I strongly believe Bitcoins is a mysterious concept as we don’t know who is behind the cryptocurrency and no sovereign connection which makes it a very dangerous proposition.

The day Bitcoins fail Gold will again gain significant prominence. Nevertheless, post the correction 8-10 percent allocation towards Gold can be looked at from a long-term perspective.

Q) Small & Midcaps have become bulls favourite as the segment is turning out to be resilient even on dips as compared to benchmark indices. What is powering the rally in the small & midcaps space?

A) Generally, small & midcaps go through bouts of underperformance for 3-4 years and then massive outperformance in the next 3-4 years and that has been the pattern we have witnessed over the last 20 years.

We are of the opinion that mid & small-cap stocks have gone through a significant downturn from 2017 to 2020 and now looking to reverse.

Fundamentally, mid & small-cap spaces get a good boost when the overall economy is picking up and also favorable policies from the government come through.

We have seen significant reform-led announcements from the Government during the Union Budget with regard to infrastructure which eventually benefits a lot of domestic economy-led companies.

This includes companies from construction, real estate, cement, capital goods, industrial products, healthcare sectors which are predominantly belonging to mid & small-cap space.

We are quite constructive on this segment of the market and believe they can do very well in the next many years and create wealth for investors.

Allocation to these segments could be ideal and also matches with the opportune timing as well.

Q) Amid the privatization buzz – what should investors do with the PSU space?

A) PSUs, in general, are operating in the core to economy sectors, and therefore overall economic improvement is going to help them a lot.

Moreover, government stance on these companies are changing a) making the companies stronger b) not selling the stocks at any price and started doing buybacks which is very good from a valuation perspective c) Planning divestment in certain non-core PSUs which will again improve the sentiment around PSU space.

Overall, it is the right time to invest in PSUs if you have time on your side and ride through volatility as a lot of news-driven movements in the markets could be expected in the coming months and years.

Q) Where is smart money moving especially in the last few weeks – global setup has changed a bit, and on the domestic front strong micro and macro data does suggest economic and earnings recovery in the offing?

A) Global allocators are moving money from Developed Markets to Emerging Markets. When this trend starts it goes on for many years. The trend has just started in Sep’20 so few more years to go.

I believe that equities is the favoured asset class where the smart money is moving. There will be domestic and global news flows which will bring sudden sell-offs and bouts of volatility but ultimately domestic economy when it improves there is less chance that money moves out, rather huge inflows will come in.

Q) How are foreign investors viewing India especially after rise in US Bond Yields?

A) Some FII money can reverse in the near term as huge flows came in such a short period of time but the overall inflow into Indian markets are going to gain steam in coming quarters and years as the economy is on a strong footing.

US Bond Yields may move up and that has happened in the 2003-2007 period also but markets did well because the earnings growth was massive.

So, the US bond yields or inflation if it doesn’t move up fast and a slow run-up only expected then it is not going to hurt the growth in a big way, so it can happen earnings growth to supersede any other changes in the market.

All eyes have to be on earnings growth and how the domestic economy is picking up in coming quarters and years that will be the key factor FIIs will be considering when looking to invest in India.

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