Viraj Mehta, MD, PMS at Equirus sees the travel and tourism sector as a dark horse with the vaccination drive picking pace and pent-up demand for travel.
Mehta is a market veteran of over 12 years. He was selected by Wall Street Journal (WSJ) as part of the “Asia’s Master Stock Picker” series for India and was also part of the award-winning fund management team at Franklin Templeton Investments.
Here are the edited excerpts from his interview with Moneycontrol’s Kshitij Anand.
Q) As we step into the second half of 2021 what are your views on markets? Nifty50 rallied 13% in the first half, do you think the momentum will continue?
A) The nature of complex systems like markets is such that it makes predicting movement extremely difficult, more so in the short run.
In long run, the environment is shaping up well for the market and headline indices may carry on their move upwards. Having said that, corrections will be an inevitable part of the journey.
Q) Any sector that could emerge as a dark horse towards the close of 2021?
A) Travel and tourism sector fits the bill of a dark horse. When the confidence in the populace is restored with vaccination reaching a critical mass, it should unleash pent-up demand for travel.
For a long time, people have been confined to their homes and as social animals, we want to travel, meet friends and relatives, and have a good time. That should augur well for the travel sector.
Q) In terms of IPOs we saw an exciting first half, and now as we enter the second half the biggest attraction would be the Zomato IPO. What are your views on the primary markets for 2H2021?
A) Second half will see technology companies like Zomato and Paytm entering Indian markets. They bring a new flavour to the markets.
These companies are known to absorb a lot of cash for long periods before they reach a scale and become profitable.
Investors will have to recalibrate the ways in which they value these kinds of companies. We will keenly follow the space from a learning perspective.
Q) Do you think the recent announcement made by the FM to support the economy is enough? Or, more should be done to achieve a double-digit growth rate?
A) India is a capital-starved country and there is a limit to the amount of stimulus that can be provided. Providing a targeted safety net to the worst-hit sectors is a sensible approach that the government has taken.
Improved health infra and rapid vaccination can go much longer in bringing the economy on track for double-digit growth.
Q) What are the cues that you are getting – any signs of topping out? Dollar is getting strong, and the impact is visible on the rupee as well? What are your views?
A) Rupee weakening combined with rising crude and other commodities has important and not so good implications in terms of current account deficit.
This could lead to inflation and in turn higher interest rates which would be bad news for the markets. However, RBI is sitting on all-time high Forex reserves and is in a much better position to handle such shocks than any time in the past.
While markets may see some pressure but with a growth in corporate earnings, this should not be a big challenge.
Q) WHO has warned of a third wave in Europe and other parts of the world. There are few cases that signal that a possible third wave is here. Do you see more lockdown that could come into play and disrupt the business cycle which would mean that earnings estimates would have to be revised again?
A) After what we went through as a country during the second wave, it is natural that we must be extremely cautious. With that caution, learning, and preparation, we are in a much better position to avoid or at least reduce the intensity of the third wave.
If and when a third-wave happens, there might be disruptions, however, it might not have a big impact on the earnings.
Q) 2021 also marks 30 years of reforms for India. What is your take on that? For the market, it never looked back – do you feel that the current reform process are equally strong and will take the economy to new highs?
A) Reforms in 1991 have served us well and formed the base for the next set of reforms which were long due. This government has been able to introduce a lot of reforms, but implementation has had its share of challenges.
Also, a lot more reforms are still required. The effects of the current set of reforms will only show up in coming years. With many external factors lining up, we believe the next decade could see a real transformation of the economy and country.
Q) What is your call on the small & midcaps. This space has been resilient in the recent past and has outperformed the benchmark indices so far in 2021. Will the momentum continue in the second half as well?
A) Small and Midcaps were big underperformers in the past 3-4 years. With this rally, they have just caught up with the headline indices. If they follow the historic pattern, the coming quarters should see further outperformance.
Having said that the new buying opportunities have certainly dried up and investors must be very selective in the kind of companies they invest in.
Q) Someone said that don’t chase what has done well in the last six months. Do see the underperformers of 2021 making a comeback in the second half?
A) Lot of sectors that had underperformed over the past few years have taken the lead in the past year while leaders of the past have taken a breather. Given the nature of the cycle, we believe the underperformers will catch up over the coming quarters as the economy starts gaining traction and vaccination picks pace.
Having said that, the learning from the past cycles has been not to go down the quality curve to just because better quality companies have run up. One should only buy those underperformers that satisfy the quality criteria.
Q) Which are the next big themes emerging on D-Street?
A) We expect Capex from the government’s infra spending programs as well as private capex in manufacturing to drive demand for industrial and engineering companies.
The order book in these companies have shown good traction and it should drive revenue and profitability in coming years.
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