A strong political leadership, an unrelenting reform process, and a host of cost-cutting exercises taken up by corporates- all these have created a base for robust growth over the next few quarters, provided we do not face any other unforeseen negative or disruptive event, says Deepak Jasani, Head of Retail Research at HDFC Securities.
“However, one will have to be vigilant for any developments on the socio economic front due to the shift from unorganised to organised and the consequent loss of jobs and loss of income and its effect on the social fabric,” he says.
Sectorally, he feels banks – both state-run lenders and their private peers – could come back in the reckoning. Auto and Capital Goods can also do well after subdued performance over the past few quarters, says Jasani in an interview with Moneycontrol. Excerpts from the interview:
The market is on a rally. What, according to you, have been the main reasons for this? Do you think it will continue till December?
Our markets have kept rising on hopes of faster return to normalcy and India emerging stronger and as a more attractive destination post a series of reforms that did not show any slowdown despite the pandemic. The flood of new investors after the second wave of the pandemic has also helped deepen the markets and diversify the source of funds.
After rising so sharply, the markets are due for a realty check. Going by the initial Q2 results, corporate profitability has come under pressure due to commodity price inflation and supply chain issues. At the same time, the valuations are high going by historical standards. While the macro situation shows signs of improvement and continued reforms thrust could result in faster growth over the medium term, temporarily the markets may be fairly valued and in the results season, we could see rotational profit-taking, while the indices may not go anywhere in a hurry.
In this ebullient mood, markets seem to be ignoring the emerging negatives like commodity price inflation, supply chain issues, reversal of monetary stimulus, increase in the interest rates across the globe, possible damage to the asset quality of lenders, and slow job creation even as automation picks up in the shift from unorganised to organised.
The Midcap and Smallcap indices gained 50 percent and 66 percent in the current year. How should investors approach these segments?
Midcaps and smallcaps remain attractive for retail investors due to the possibility of gaining alpha they provide in a trending market. However, the new breed of investors has to learn from the mistakes made by investors in the past and not get carried away at market highs based on just peer valuations or expected value unlocking. They have to either go for mutual funds investing in these categories or do extra due diligence after acquiring skills of shortlisting and evaluating stocks.
Would you suggest a recast of the portfolio for investors now? What asset classes would you advise and what about the asset allocation?
Anytime is a good time to do a portfolio review and rebalance asset allocation. In bullish times, typically the portfolio of stocks gets bulky and asset allocation gets tilted towards equity. This has to be corrected to avoid repenting when the markets enter a long correction phase.
Depending on the risk appetite of the investors and time horizon, exposure can be taken to different classes of equities and assets. Gold may not give regular return but a small allocation to gold in a systematic way may be taken to get a hedge against inflation and currency.
What should be the investors’ approach, given the current equity market scenario?
Do a portfolio review, weed out the low-quality stocks and reduce the number of stocks held, do asset allocation review and bring down the equity allocation if it has exceeded that originally planned. Decide to take some profits in stocks that have run exceptionally well. Raise some cash to deploy when the markets correct. Reduce direct equity exposure and go for mutual funds in a SIP manner for new investments.
The new age companies that quote at very high valuations can be avoided by investors at this stage as there is a possibility of poorly advised investors incurring sharp losses a few quarters down the line after the wheat is separated from the chaff within the new age companies.
Which sectors look attractive for investment now and why?
PSUs have enough steam left even after the Air India selloff and some progress on BPCL and Shipping Corporation of India divestment. Banks (both PSU and private) could come back in the reckoning. Auto and capital goods can also do well after subdued performance over the past few quarters.
Do you believe that we are in a multi-year bull run and multi-year growth story? Can you elaborate?
After a series of disruptions since 2016, corporate earnings have been impacted while valuations have remained firm or risen on hopes or expectations of better times ahead. The strong political leadership, the unrelenting reform process, the cost-cutting exercises conducted by corporates have all created a base for strong growth over the next few quarters provided we do not face any other unforeseen negative or disruptive event.
However one will have to be vigilant for any developments on the socio economic front due to the shift from unorganised to organised and the consequent loss of jobs and loss of income and its effect on the social fabric. The creation of more and more unicorns helps create a new set of entrepreneurs, but its effect on the rising inequality of income and wealth also needs to be considered and remedied. Only then the real benefit of demographics and its impact on consumption spend will be realised, which again will push up the corporate earnings and valuations.
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