Upadhyaya says that in overall equities, these are good levels to start nibbling back into increasing equity allocation, so one should not be too negative at this point of time.
We have seen an 18-month long consolidation and some correction in the market. How is the valuation picture looking in your view? Both the largecap as well as the small and midcap universe may have seen higher price damage than the largecaps in the last few months?
If you look at the largecaps first and the valuations there, the valuation risk seems to be very minimal at this point of time. Yes, there is still no real uptick in terms of the earnings growth that is visible but given that it has corrected quite nicely over the 18-month period, we see that the one year forward multiples are well below long term averages. So to that extent, one cannot rule out further volatility but if any investor is looking at investing from a longer term perspective of three to five years, then these are very good valuations to start looking at domestic equities, especially the largecaps.
If you look at midcaps and smallcaps, although valuations there also have corrected, but whenever there is some macroeconomic advent, these segments tend to really feel the pinch more than largecaps. Also, even after adjusting for recent underperformance of mid and smallcaps, if you look at last three-years’ performance, midcaps and smallcaps have really done much better than largecaps.
So to that extent, as long as the nervousness continues, maybe we will see bouts of profit booking in case of midcap and smallcap stocks. However, in overall equities, these are good levels to start nibbling back into increasing equity allocation, so one should not be too negative at this point of time.
What is the significance of today’s Fed meeting in your view? Do you think that the last fortnight or so of the turmoil which the financial markets globally have seen, could to a large extent force the hand of the Fed or even our own central bank, when we meet later in April and that rate hike cycle may be coming to an end somewhere?
That is a very difficult call to take. And to us, it seems like we are not close to a reversal in terms of the interest rate hikes whether in India or in the global economies. Simply, most of the central banks are still worried about inflation which is running at quite high levels. It has been quite sticky as well.
Yes, the recent negative developments surrounding a few of the banks will definitely dominate the discussion. Having said that, we do not believe that there will be a reversal at this point of time or even a thinking towards reversing the rate cycle. Yes, maybe the pace of interest rate hikes from here on will be more moderate than what we had seen in the past and anyways that was about to happen given the sharpness that we had seen. Some of these events would only add to that kind of a philosophy. So overall, we believe that interest rate hikes will still continue but maybe at a moderate level as compared to what we have seen in the past. Also, the frequency would be much lesser than what we had seen in the recent past.What are your thoughts on the areas of the market where you would be a buyer if the market continues to remain choppy or declines, where the structural story is very strong and earnings quality is resilient? If offered at lower valuation, there should be comfort in buying?
We believe that banking is one of those segments. Clearly, because of some of the events of the recent one or two weeks, we have seen a lot of downside volatility on the banking stocks in India. However, our banking regulations are very robust. The regulatory framework is well in place and there is no fear around our banks.
There are no direct linkages with any of the banks that have gone bust in recent times. Clearly, the credit growth seems to be improving. We had seen retail growth growing at a healthy pace in the past. Of late, we have been seeing some pickup in public spending as well as a little bit of green shoots in private capex as well, so these two will also augur well in terms of the overall credit growth as we go forward. There are absolutely no asset quality issues at this point of time. The whole scenario is very benign. There is some section of the market which believes that given the fact that interest rate hikes could continue, there could be some more margin compression in the profitability of the banks but we believe that at least for the next one or two quarters you may not see that pain.
Even when you see margin compression, the credit growth is so strong that this will be one fact which will continue to show earnings growth much better than the market average. So to that extent, over the next couple of years, this is one sector where we are confident that earnings growth will be superior to the overall market average. And after having seen valuations also getting corrected in the recent times, we believe that there is scope for outperformance from this sector.
There have been unseasonal rains across the country. Even before that, there was a scorching heat wave as well. This disruption in weather seems to be indicating damages to vegetables and even standing crop. Do you think this is also a risk and inflation, fight against inflation, this will become like an impediment for RBI as well?
One should be aware of this risk and we need to monitor the weather pattern as we go forward in terms of impact on overall agriculture and also inflation. Having said that, in the last couple of years, monsoons have been really strong. Sentimentally, if there is a disturbance in the weather and if agriculture of this year gets it, that will have an impact on demand. But in terms of inflation, it should not really hit further given that the water levels in the ground are sufficient for this year’s agriculture.
Even if there is some variation, we should be able to cash in on the kind of stocks that we have at our end. Overall, inflation may not really go up because of the changes that we are seeing in terms of the weather at this point of time at least. But yes, sentimentally it could have some impact on consumption and on the markets as well. As it is, the consumption side is not really strong at this point of time. So to that extent, those concerns could continue for some more time. So definitely we need to keep watching this space.
