DAILY VOICE | We might be at the start of a capex cycle which may last for 3-4 years: Prasanna Pathak of Taurus MF

Market Outlook

Prasanna Pathak, Head of Equity, Taurus Mutual Fund says the market may continue to grind sideways or upwards for longer even though the general consensus among market participants expects it to correct at least 10-15% from current levels.

Pathak is a market veteran of over 17 years.

In an interview with Moneycontrol’s Kshitij Anand, he said IT, pharma and chemical stocks are poised to do well. Among others, agri/ agrochemicals, capital goods, infrastructure and corporate banks look interesting. Edited excerpts:

Q) As we step into the second half of 2021 what are your views on markets? 

A) I think there is general consensus among the market participants that the market should fall at least 10-15% from these levels. Hence, I might not be surprised if markets continue to grind sideways or upwards for longer.

We are seeing the smart rotation of sectors and stocks thus aiding the grind. Key factors to watch out for are global liquidity and flows, vaccine drive, unlock timelines, inflation/ interest rates, and earnings momentum.

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) 2H22021 calendar for primary markets is even more crowded than the first half. Companies want to take advantage of easy money and a strong appetite for equity.

Hence the rush and rightly so! Needless to say that one must exercise caution/due diligence in choosing the right ones.

The buoyancy in the risk-capital will, at a macro level and in the medium term, have a positive impact on the economy, CAPEX cycle, and job opportunities.

Strong cash flows and equity-capital raise has led to a strong deleveraging cycle in many of the listed companies also.

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) Within the fiscal constraints, the FM is doing its best to support the economy. Though the measures are not enough, we believe that FM may want the current uncertainty over covid to wane a bit before announcing more direct measures.

Q) What are the cues that you are getting – any signs of topping out? The dollar is getting strong, and the impact is visible on the rupee as well? What are your views?

A) It is futile to pre-empt a topping-out. Behaviorally, most participants are expecting a topping-out. But, it may grind longer and the corrections may be shallower.

Short term picture looks hazier. However, we believe that we might be at the start of a capex cycle which may last for 3-4 years.

Hence, regardless of the short-term volatility, we remain positive on the prospects over the medium term and would like to focus our energies in identifying the right stocks and sectors.

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) I think Covid is now a known event. There is a good amount of data and experience available with the people, corporates as well as governments.

So, I think, countries/corporates will do a better job in terms of managing the impact of the third wave if it happens. Unkown/out-of-syllabus events tend to have a greater impact on the markets as well.

If you notice, the markets were relatively calm during the second wave, despite the second wave having a more severe impact on the people, especially in countries like India. Hence, I believe that a third wave may not have a major impact on the markets like the first wave.

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) There might be some reversal/underperformance in smallcap /midcap space in the short term on the back of a recent sharp run-up.

However, one must take into consideration the fact that they have underperformed the large-cap space for a prolonged period from Jan 2018 to the end of 2020.

Many of these companies have cut costs, got leaner, and strengthened the balance sheet in the interim period. So, if the economy does well over the next 2-3 years, some of the stocks in the mid/smallcap space will outperform by a good margin.

Q) Do see the underperformers of 2021 making a comeback in the second half?

A) As indicated above, there is smart rotation which is happening at regular intervals. So a tactical shift can happen. However, some themes will continue to outperform.

Q) Which are the next big themes emerging on D-Street?

A) IT, Pharma and Chemicals are the mature themes which are expected to do well. Among other themes, Agri/ agrochemicals, capital goods, infrastructure, and corporate banks look interesting.

Q) Any sector that could emerge as a Dark Horse towards the close of 2021?

A) Auto sector continues to reel under the pressure of lower demand due to lockdowns and high input prices. There have been price hikes recently by many players.

So, if demand revives post lockdown and commodity prices remains stable (or falls), the sector can bounce back smartly.

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