The momentum in the market is really strong and another rally of 8-10 percent is not really very difficult in the presence of such strong liquidity, says Taher Badshah, CIO, Equities, Invesco Mutual Fund.
Speaking to CNBC-TV18 he said that the market remains constructive post the big BJP win and on the back of global recovery.
Outlining his sectoral outlook, Badshah said he remains overweight on consumer discretionary, auto and media companies.
There is decent amount of support in private banks and non-banking financial companies (NBFCs) as well, he said.
On the recent appreciation in rupee against the US dollar, he said that in the near term, it is seeing a bit of headwind but one can expect impact on margins and earnings in some export-oriented companies.
Below is the verbatim transcript of Taher Badshah’s interview to Latha Venkatesh, Sonia Shenoy, and Anuj Singhal on CNBC-TV18.
Latha: What about the markets, we have seen this wall of money come from foreign institutional investors (FIIs) yesterday, now with domestic liquidity getting abetted with foreign liquidity are you looking at somewhere around 10,000 round the corner?
A: I think the momentum is pretty strong and therefore another magnitude of rally of the order of 8-10 percent is not really very difficult in the situation of such strong liquidity and the fact that after the very strong mandate that we saw in the elections couple of days ago, that is something which at every level will probably provide a lot of downside support. So, to that extent, the market remains a little more constructive than what would have probably been expected out of it.
However, the good part is that I take a decent amount of conviction in the fact that we are seeing a good amount of global recovery as well especially in emerging as well as developed markets synchronously and that is something which probably is reflecting in global market indices, it is probably reflecting in prices of metal commodities and so on. So, I think, there is a certain amount of underlying expectation of a global economic recovery also coming in which is actually causing the overall equity market scenario and global markets as well in India to be a much more constructive.
Anuj: What would be your portfolio strategy now, do you think the tried and tested strategy of backing private banks, discretionary consumptions, NBFC, that is going to continue working here as well?
A: Kind of pretty much, we are almost aligned on similar lines. As of today we are pretty overweight on consumer discretionary as well as things like automobiles, media companies, and so on. We see decent amount of support in private sector banks and opportunities in the NBFC space as well. We all know that quite a lot of these NBFCs especially the rural inclined NBFCs were relatively more affected because of demonetisation and now as we are on our way to remonetising the economy over the next few months, I think some of these past problems of the NBFC sector might probably kind of recede and that may provide opportunities in the NBFC space as well going forward.
So, I think at the margin, these are our preferred sectors, at the margin we are probably also kind of a little more positive on IT than we were earlier and that is largely borne out of valuations and so these have been some of our prime sectors that we have been sporting more recently.
Sonia: The big talking point of today is the way the rupee has surged, 65.50 now to the dollar, how does this really impact some of these export oriented companies?
A: I think clearly the sensitivity as far as IT companies in particular is something which is important. It is 1 percentage point kind of gain in the rupee, leads to about 1-1.5 percent kind of depreciation or a decline in earnings for some of these tech companies and to that extent, there is a little amount of sensitivity which is coming around here. I don’t know whether it is still structural or probably it is more cyclical led by the expectations around the Fed meeting and the fact that some of the emerging market currencies have also started to lookup in the other direction and last but not the least of course not to forget the strong political mandate that we got here.
So, I think all that is probably adding up to the rupee’s strength and to that extent in the near term it is a bit of a headwind. We have to also see whether any part of this can probably get passed on to consumers. However, at the immediate outset, one can probably expect some bit of impact on profitability or margins of some of these export oriented companies.
Latha: How positive are you on the consumption front, is it just a rebound after the November-December debacle, if you were to smooth out the curve for that and look from October to January, are you really seeing a secular consumption growth, therefore would you bet on any stocks?
A: There are sectors which are showing secular consumption growth, but not all of them and to that extent we have to be kind of choosy between even the consumption theme as to what we like and what we don’t like. The thing is that as we all saw out of the evidence that we saw in the last quarter result season that urban consumer oriented stories were relatively more resilient than the rural ones and I think that is some part of it which can probably reverse. I think the rural demand can probably get a little more evened out and more stronger than what was earlier.
Even the fact that we have seen quite a lot of improvement in global soft commodity prices, is something which is probably going to be positive for rural incomes in the near to medium term and we all are hoping for a very good monsoon and if that comes about, then there is a good amount of demand strength which can once again originate out of the rural segment. So, I think some of those areas, or some of those segments which are more geared towards rural or semi-urban markets, might probably start finding a little more strength as we go along. However, right now it is a little more sector specific and probably little more skewed towards urban consumption stories.
Anuj: Some of these pockets have now started to trade much above median valuations and so much money is now chasing so few stocks. Everyone is bullish on these stocks now, do you think that there is a risk of creating a bit of a bubble in the near term in some of these pockets?
A: There is always a likelihood, but we have seen again valuations being far more stretched and let us say some of the categories like staples, etc. for example where we have not really seen as much of growth and a good chance that there can be margin compression going ahead simply because the fact that commodity prices have risen pretty substantially, so, that is more at risk.I think some of the other consumer durable oriented stories or let us say even some of the consumer industrials or so to say consumer industrials have been not as expensive at least relative to their more medium-term underlying earnings growth and they are also kind of more larger beneficiaries of the possibility of shifts from unorganised to organised sector and as we formalise India more and more going forward as a result of demonetisation, unintended consequence of demonetisation and probably even goods and services tax (GST), I think in many of these industries probably the growth rates could be a little more surprising compared to what we have probably been used to and maybe that probably justifies some of their multiple premuimness.