Even as flagship indices hit record highs, Taher Badshah, Director of Investments – Equities, Invesco Asset Management, says it is an investment market for investors with a good investment horizon, at provided they keep their performance expectations under control. He believes that the continued rise in commodity prices is a greater risk to Indian markets than any global event. Excerpts:
What is the biggest risk facing the markets right now?
Globally, one risk is the rise in interest rates, which will take place in 2023. The other thing they have not yet addressed concerns their exit from the accommodative stance. But that’s not going to be very disruptive, in my opinion. While the pace of monetary support will decrease, this does not imply withdrawing liquidity from the market as the accommodation is intended for a health-related crisis, and it is not a typical economic crisis.
In India, the biggest risk to the markets is the continued rise in commodity prices which then begins to affect the profitability of companies, which in turn could hurt the markets.
In addition to this, the irregular monsoon, the fall in the purchasing power and purchasing capacity of rural people due to the impact of the virus, if any, will be some of the other more domestic risks.
So what would you call a major concern for an investor today?
Any change in the path of interest rates will likely be detrimental. The impact will be a function of the amount of rate hikes and if those rate hikes are a function of the result of higher inflation, and higher inflation is also the result of better growth, then I think the markets will be able to take it in their stride.
But a scenario of no growth and falling interest rates is more worrying. From there, market returns will be based on a normal recovery in the economy. Investors need to keep their return expectations under control, and with a good investment horizon, this is always an investable market.
Do you think the current valuations are justified?
If you were to go back to early 2020, for example, the markets were trading around 20-22 times on the one-year futures model. Today, the valuation at one year is similar.
And we are in a scenario where we look forward to a better earnings trajectory materializing over the next two years for the Indian economy as well as for the world as a whole. Additionally, over the past 12-18 months, the interest rate table has come down quite significantly across the world. It is therefore so natural that valuations move in the other direction.
I would define the ratings as probably fair. That said, there are pockets where you see the euphoria quite visibly, which can probably be avoided.
Which sectors seem attractive in terms of valuation, and which sparkling ones, as you just mentioned?
One area you can at least take action on is finance. The whole banking space has probably grown stronger than it was about two years ago. And yet their valuations are likely below their own historical averages.
We also like manufacturers. This is a sector that can normally benefit from significant operating leverage if the economy is on the rise over the next two years.
So what are apparently high valuations today will not necessarily be the case, if profits turn out to be much higher than what the market has predicted today.
Technology is another area that we like for revenue and visibility of growth despite higher valuations.
We have pockets of FMCG, Consumer Discretionary, and Consumer Staples, which still have valuations a bit broad and are not very easy from an entry point of view.
But then there are parts like automobiles, which are kind of mixed. The industry as a whole has become cheap in terms of valuation. But we were struggling with a little clarity on the growth there.
Within the automotive ecosystem, we are better off with some of the well-diversified accessories.
Should investors avoid small and mid-cap stocks due to their high valuations?
The valuation problems are more acute in the space of mid and small caps.
Correction is possible in this space. But I don’t envision the scenario, like in 2018 and 2019, where mid and small caps were discounted by around 30-40% compared to large caps. Having said that, there will always be opportunities. Once the economy is open, it is businesses that will benefit.
Are the government’s policy measures sufficient to stimulate the economy?
On the manufacturing side, over the past six to eight months, we’ve seen quite a bit of push, especially when it comes to expanding PLI to various segments.
On the infrastructure, there is the determination for the national monetization program, which is an infrastructure modernization program. From a political point of view, there is no shortage of political measures.
It’s more about implementation. But we see enough pressure from the government to prioritize growth.