Rahul Singh, CIO-Equities at Tata Mutual Fund, says the Indian market is trading at a 10-15 percent premium on the price-to-earnings (PER) valuation front compared to the historical range and at 65-70 percent premium to other emerging markets.
“While these valuations can be considered fair and justified by the lower bond yields, earnings recovery and pro-growth/pro-reform policies, it leaves little room for error,” he said in an interview to Moneycontrol’s Sunil Shankar Matkar.
Singh is a market veteran of over 25 years and currently heads the fund management and equity research teams at Tata MF. Edited excerpts:
Q: Considering the expected economic & earnings growth, do you think the BSE Sensex and Nifty can double from current levels by 2025?
Indian markets are trading at price-to-earnings (PER) valuations that are 10-15 percent premium to historical range and 65-70 percent premium to other emerging markets. While these valuations can be considered fair and justified by the lower bond yields, earnings recovery and pro-growth/pro-reform policies, it leaves little room for error.
In this scenario, equity returns will track medium term earnings growth which should be in the 12-15 percent per annum range. In case the markets get overvalued from here on, the equity returns will lag earnings growth.
Q: Crude oil prices hovered around $ 70-75 a barrel since the last several weeks. Do you expect the oil prices to cross $ 100 a barrel by next year with the completion of vaccination across the globe? Do you see any major impact of electric vehicle segment progress on oil prices?
Crude oil prices are a function of demand-supply as well as the geopolitical developments. While the latter is unpredictable, the demand side might see a short term revival on opening up. However, the threat from electric vehicles as well as general trend away from fossil fuels will cap the oil prices in the long term.
Q: Where can one invest now?
The current market scenario and valuations require some level of risk-management both at the asset allocation as well as (equity) portfolio level. Depending on each individual’s situation, we would recommend a healthy allocation to Hybrid/BAF categories coupled with Large & Mid/Flexicap options. Large lumpy allocations to small cap category should be avoided.
Q: Metals have been the biggest outperformer in FY22 with 44 percent gains. Do you think the rally can extend further in coming weeks or is it the time to be cautious on the segment?
Metals demand has benefited from the economic recovery and fiscal stimulus across the world even as the supply side has been constrained due to years of under-investment as well as production cuts in China. We believe that the call on metals sector is now more about these high prices sustaining for longer period rather than them going any higher.
If prices sustain at these levels, high profitability of the combined with deleveraging can still offer some equity upside. However, the valuations have reached a stage where one needs to be more selective and probably prefer non-ferrous over ferrous.
Q: The equity mutual funds flow dipped sharply in August to Rs 8,666.68 crore but SIP inflow jumped closer to Rs 10,000 crore. Do you think the volatility will continue in equity MFs inflows in coming months?
Flows have been strong on the back of good returns. Add to that there is TINA (there is no alternative) factor since debt yields have been so low. So equity fund flow could be positive though investors may choose to stagger their entry via SIP/STP.
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