Prateek Agrawal is the Business Head & CIO at ASK Investment Managers
“Overall, I would stay focussed on earnings and valuations and policy making in India rather than what is happening elsewhere. This should be especially true because the influence of foreign capital on the Indian market is reducing,” Prateek Agrawal – Business Head and Chief Investment Officer (CIO) of ASK Investment Managers, told Moneycontrol in an interview.
Large FPI selling has been readily absorbed by MFs, insurance, Pension and PF funds and this is a structural change that has taken place, he believes.
Agrawal’s preferred valuation methodology, at present, is to look at 5-year PE averages and earnings yield to bond yield indicators. “These indicators point to an index target of 18,250 to 18,500 over 2022. This leaves just about 7 percent upside from the present levels,” says Agrawal, who has over 27 years of experience in capital markets, with long, distinguished stints in sell side research, investment banking, and advisory experience.
He adds that with valuations no longer in very cheap territory, volatility could recur during the year (2022). Edited excerpts follow:
What should investors do with high multiple stocks as the market faces lots of risks including supply side shocks and inflation?
I think the profit outlook for the market overall has not gotten impaired. The outlook for the large profit pools of IT, Banking, and commodities has either remained same or has gotten enhanced. Accenture’s results point to continued buoyancy in the IT space. Commodities have benefited from the Russia-Ukraine situation. The banking outlook is unchanged and lower provisioning should drive PAT growth.
The problem in the immediate future does lie with smaller profit pools of cement and consumers (both durables and staples) where immediate profit delivery would be impacted on account of higher input prices. However, this part is now a contra play and a defensive. As central banks focus on inflation and it comes down (also as geopolitics sorts itself out), this part should respond positively.
I expect Q2 of FY23 to show margin stability for this part of the market. However, markets being forward looking vehicles may respond much earlier. This was seen recently. On days when oil prices recede, stock prices of businesses where oil products are a major input did react strongly.
I believe that lower PE (price-to-earnings) commodity businesses are the most risky part of the market. Commodity prices are not sustainable at these levels. As commodity prices normalise, so would stock prices.
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Do you think the RBI will remain behind the curve in terms of policy tightening over the rest of the calendar year?
Western world policy making did pump in a lot more liquidity in the system versus what India experienced. Our forex reserves are high and that gives the central bank some flexibility in timing interest rate increases rather than following the west. Also, inflation in India is lower than many western countries and the gap versus the acceptable range is narrow in India versus the west. This again gives RBI some flexibility in tightening the cycle.
While inflation is a worry, it is only over the concerns that policy is trying to address. To my mind, the main concern is the fact that India has seen a K shaped recovery and many areas of the economy are still not doing well. Contact-intensive services are one such area. The self-employed is another such area. Normalisation after Covid is helping but maintaining growth momentum is very important to get these people back and restoring their incomes.
I think inflation is more on account of geopolitics, which is squeezing supply and supply chain disruptions rather than on account of strong demand pull. Monetary tightening would probably impact growth more than inflation. I think in this situation while some interest rate increases would take place, we should expect to see lower increases versus what, say, the FED effects. In any case the interest rate differential with the west has reduced over the years and given the narrowing inflation trajectory and our relatively larger economic size and lower currency depreciation, it should be expected to reduce further.
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What should the Fed’s strategy be henceforth, especially after announcing its first rate hike since 2018?
In any rate increase cycle, the first few rate increases are absorbed easily and markets respond positively as it is taken as a validation of strong growth of the economy. This should continue till interest rate increases are in line with economic growth prospects. Interest rate increases continuing while economic growth starts to falter is when markets could turn unsupportive.
In the past, the US used to be the largest economy by a large margin and hence its policy influenced all central bankers. With the growth of China, one should keep an eye on what the Chinese policy makers are doing. Their policy stimulus has been opposite to that of the US and they have expanded stimulus in response to housing stagnation.
Overall, while the FED rate increases would lead to volatility during the period they take place, they won’t provide a direction to the market. Our market direction would be on account of our own policy making and earnings growth trajectory of our companies and valuations. If we look at the past taper period that started in September 2013, our markets were strongly positive in 2014 on a single-party majority government, were negative to range bound in years when we recognised our banking sector issues, implemented demonetisation or tackled the ILFS issue and positive in the year of the pathbreaking reforms of RERA and GST.
Hence, overall, I would stay focussed on earnings and valuations and policymaking in India rather than what is happening elsewhere. This should be especially true because the influence of foreign capital on the Indian market is reducing. Large FPI selling has been readily absorbed by MFs, insurance, Pension and PF funds and this is a structural change that has taken place.
Is this the time to pick quality names, including Britannia and HUL, despite challenges they are facing right now, including higher commodity prices and supply side shocks?
Without focussing on individual names, I have already said that consumers are feeling the pinch at present. Their stock prices have declined materially. However, they present a contra trade today and should respond positively as commodity prices cool off. If we look at many of the best companies in the space over the period from 2008, we would see that in-spite of events like the Global Financial Crisis (GFC), Taper, Banking issues in India, ILFS crisis and most recently Covid-19, these companies have managed to deliver a new all-time highs in practically every calendar year. A decline in prices of the best of consumer companies should hence prove to be a good contra trade over the next one year.
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Do you think the market has already priced in headwinds, including global inflation, oil price rise, the Ukraine-Russia crisis and Covid?
The past period has seen heightened risk perception. This was on account of higher commodity prices (particularly oil), margin rule changes for the F&O segment, election outcomes in 5 major states, inflation and first interest rate increases apart from a large LIC IPO that markets would have to digest. I think many of these events have resolved. Election outcomes were better than what the market expected. F&O changes and the LIC issue were postponed. Russia and Ukraine started talking, which increased the prospects of a resolution, and oil prices receded from highs and markets responded positively. As I write this, the market is delivering a positive 2-3 percent return in the month of March.
My preferred valuation methodology, at present, is to look at 5-year PE averages (large changes in the indices have made longer-term comparisons less relevant) and earnings yield to bond yield indicators. These indicators point to an index target of 18,250 to 18,500 over 2022. This leaves just about 7 percent upside from the present levels. Normalisation of higher risk perception should provide a bounce. Strong earnings momentum and continued retail and MF participation in the market should keep the breadth of the market quite good. Going forward, while the indices may stagnate, the broader market may perform better.
With valuations no longer in very cheap territory, volatility could recur during the year. Next time the F&O rule change comes up, and also the market would need to absorb a large IPO like LIC, volatility will come back. Buying on dips should prove to be a good strategy. Focussing on rich, high-quality businesses that can deliver strong volume growth for the next several years is where we are focussed on and believe that this could be a good way to beat market volatility.
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