Nimish Shah, Chief Investment Officer – Listed Investments at Waterfield Advisors feels valuations seem stretched on an FY22 basis, but, if the economic growth is able to sustain and corporate earnings see a 15-18 percent growth in FY23, then the valuations may not seem that unreasonable.
Given the current high valuations, investors should revert to their strategic asset allocation of equity and debt, he told Moneycontrol’s Sunil Shankar Matkar, in an interview.
Given the stellar run markets in the last year, it is reasonable to expect a 10-20 percent correction, he said, adding the 10-15 percent cash should be deployed gradually whenever markets see a healthy correction.
Edited Excerpts:-
Q: Currently the markets are near record high levels. Do you think the momentum will continue in the next one year or how will the market behave till the next Independence Day?
Market levels are signalling two things–economic revival is taking the right direction and that there is liquidity with investors (both with domestic and foreign). Continued market momentum will again depend on the same two factors – economic growth and liquidity. Excess liquidity and optimism on growth can keep the markets at elevated levels for a fair amount of time.
The next two quarters would help understand the actual depth and breadth of economic recovery, based on which corporate growth for FY22 and FY23 could be estimated. Earnings dictate market movement. The continuance of momentum would largely be pegged to growth in corporate top and bottom lines. Global developments such as infrastructure push by USA and the move by the Chinese policymakers to focus on long-term structural goals to curb inequality and ensure healthy competition across all sectors, could help countries like India.
Q: What are the sectors that could boost the returns of a portfolio in next one year, and why?
With a longer-term view, the return to Capex by infrastructure and manufacturing sectors would benefit these sectors and other sectors like financial institutions and basic materials. Sectors like automobiles (except probably the luxury segment) could see revival on back of three years of declining demand. While original equipment manufacturers would see better volumes, it is the auto ancillaries and component manufacturing sector that could benefit much more. Many companies in this sector have also started to focus on manufacturing electric vehicle components, increasing export revenues for themselves.
Q: PM Modi said that the decision to repeal the contentious retrospective tax will lead to greater trust between the government and Indian industry. What is your view and what would be the impact (positive as well as negative) on segments that relate to this decision?
When introduced in 2012, this rule was viewed negatively on grounds of fairness (retrospective effect from 1962) and India was seen by foreign investors as a country with an uncertain tax environment. Repealing of the Retrospective Tax is surely an important step to ensure continued growth capital from foreign investors. And, India does need long-term alternative capital flows (apart from domestic savings) from foreign investors, especially on back of large disinvestment plans. While foreign companies like Vodafone and Cairn have burnt their fingers in the past, scrapping of this rule is subject to conditions like withdrawal of appeals against the Government by these companies. Existing disputes would be evaluated by claimants to gauge the benefits of taxation refunds versus continuation of litigation. But this is surely a step in the right direction showing the intent of the Government to provide a stable tax regime for international investors.
Q: The benchmark indices more than doubled from March 2020 lows and broader markets are way ahead of them in terms of returns. Do you think it is the time to turn cautious or the momentum will continue?
Maintaining caution at these levels should not be confused with staying under-invested in equity markets. Valuations seem stretched on a FY22 basis. But, if the economic growth is able to sustain and we see a 15-18 percent growth in corporate earnings in FY23, then the valuations may not seem that unreasonable. Given the current high valuations, investors should revert to their strategic asset allocation of equity and debt. This could be achieved by booking out of investments that may not be part of the core portfolio or by partially booking out of investments that have seen a massive run-up in the last 6 to 9 months.
Investments in Mid and Small Caps have seen a healthy mark up and increasing their share in the equity portfolios should also be evaluated. Investors could look to return to their original allocation between large, mid and small caps by gradually trimming their positions. Apart from holding 10-15 percent cash in equity portfolios, the rest of the asset allocation could be corrected through market-neutral shifts from mid and small caps to largecaps. Given the stellar run markets in the last one year, it is reasonable to expect a 10-20% correction. The 10-15% cash should be deployed gradually whenever markets see a healthy correction.
Q: What is your reading on June quarter earnings? What did the earnings season and management commentary indicate about next quarterly earnings and FY22?
The trends are positive. However, a slowdown in growth in some sectors is evident. It is the Q2 and Q3 FY22 that would be important to analyze the impact of second wave of Covid that hit the economy in May 2022. While the PMI numbers have shown a smart recovery, trends in IIP over next few months would be a good indicator of the recovery.
Q: Total 38 IPOs hit Dalal Street this year 2021. More than half of them saw strong subscription and retail investors also provided strong support to the majority of IPOs. Why is there so much appetite and has the appetite of new age investors increased significantly after Covid-19 pandemic crisis? Do you think new age investors are just looking for listing gains or wealth creation?
IPO market euphoria is at an all-time high. Add high valuations to that and it is surely a signal to be cautious. Promoters would like to make the most of bull markets to get good valuations, but the thought runs contrary for fundamentals-based investors who look for a discount to fair value. But, due to over-subscriptions of good quality IPOs, investors get miniscule allocation. Thus, pre-IPO opportunities should be scouted for investing in good quality IPOs. Else, it is a listing gains game that can be achieved only through leverage – a game only for aggressive investors.
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