DAILY VOICE | India not expensive relative to other emerging markets: Jyotivardhan Jaipuria of Valentis

Market Outlook

Jyotivardhan Jaipuria, Founder and CEO at Valentis Advisors Pvt Ltd, said that even though valuations look bloated, India market it not expensive relative to other emerging markets.

Jaipuria who is also popularly known as “Jyoti” is a market veteran of 35 years. Prior to founding Valentis, Jaipuria served as the Head of Research and strategist for India at Bank of America Merrill Lynch.

In an interview with Moneycontrol’s Kshitij Anand, Jaipuria said he sees big money moving to economy-related sectors like cement, corporate banks, and capital goods which are at a cusp of an earnings revival in the next few years. Edited excerpts:

Q) The second wave is not yet over for India, and the third wave is expected to hit in October. Do you think the market has factored in third-wave impact? What is the kind of impact you see on markets and earnings?

A) Markets are currently still grappling with the impact of the second wave. The market reaction has been more sanguine this time due to 3 factors.

Firstly, India has generally allowed factories to continue operations.

Secondly, we have more experience in dealing with the virus. With most states going for lockdown, we are seeing signs that the virus infection has peaked.

Lastly, the world markets have rallied with the vaccination in the USA and UK. India has relatively underperformed the world but in absolute terms has not fallen.

One risk is that the virus has spread to rural areas which were immune last time. While earnings will see some downgrades, we see markets remaining in a narrow range as it consolidates gains of the past year.

Q) Small & midcaps have remained resilient in the past few months. Do you think the outperformance will continue?

A) Short-term corrections notwithstanding, we think small and mid-caps will outperform largecaps over the next 2-3 years. First, they are relatively cheaper than largecaps.

Secondly, midcaps grow faster in an economic recovery. Thirdly, they have underperformed largecaps over the past 3 years. Lastly, they still are relatively under-owned amongst institutional investors.

Q) The Warren Buffett indicator is above long-term averages at 92%, according to a report. It has come down from a high of 105 in FY21. Do you see this as a sign of caution?

A) If we look at the Warren Buffet indicator or any other valuation parameter, it is clear that valuations are above the long-term averages.

But, we have to remember that they are always expensive at the low end of an economic cycle. We believe the valuation re-rating is behind us and returns will be driven by a doubling of earnings over the next 4-5 years.

Q) Where do you see smart money moving in various sectors and why?

A) We think the big move over the next few years is going to be in the economy-related sectors like cement, corporate banks, and capital goods which are at a cusp of an earnings revival. In the near term with COVID uncertainty, pharma continues to be a favoured sector.

Q) Lot of IPO have hit the market in FY21 and many MFs have taken a big bite out of it. What are the factors which fund managers look at while investing in an IPO?

A) Whether it is an IPO or buying a secondary stock, the analysis is the same. Essentially, fund managers evaluate return potential based on valuations and future earnings growth as well as the sustainability of that growth given the size of the market and the company’s moat within the market.

Q) From an FII perspective, how is India placed in terms of valuations when compared to global peers. Are we still attractive?

A) India has traditionally traded at around a 40% PE premium to the MSCI Emerging Market index given the diverse nature of its companies and superior corporate governance.

While on a standalone basis, Indian markets look expensive, on a relative basis, Indian markers are not expensive from an emerging market perspective.

However, there is concern about the emergence of the virus but if the lockdowns are lifted flows to India will come back.

Q) Which are the key risk to the current bull market? Nifty is down by about 5% from the highs – do you see more downside before things stabilise and why?

A) There are two risks to the market. First is the slowing down of the economy and hence earnings downgrades if the lockdown continues. The second factor is valuations contracting due to a rise in US bond yields that could lead to a sell-off in markets globally.

Q) According to the CMIE report, 11 lakh jobs have gone amid a rise in COVID cases. This will hit the economy and earnings of India Inc. Do you think this will put banking and financial sector including NBFCs at a risk in the near term?

A) Prior to the second wave, the economy was recovering and many companies were restoring salary cuts of last year. Banks and NBFCs were all reporting better collections.

While we may see a few months of stress given the lockdowns this month, we do not expect any meaningful strain like last year since the industry has generally been working through this lockdown.

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