The current rally is not merely liquidity driven, says Dhiraj Sachdev, Senior VP & Fund manager at HSBC Global Asset Management. While earnings have improved, the peak is still away.
“We are still in early stages of a powerful bull rally,” he says adding the early uptick in earnings is tilted towards growth in equities. The peak of earnings is still far away.
Corrections are a part of every rally. However, in this rally, corrections will be “sharp, swift and short lived, which should be bought into,” he says.
HSBC Global Asset Management is bullish on various segments like agro chemicals, specialty chemicals, cement, gold mortgage companies, non-banking finance companies and media.
Sachdev also recommends infrastructure, but advises one to be stock-specific. Government’s thrust on infrastructure, uptick in stalled projects and new orders will push the sector up.
However, IT is one sector Sachdev is underweight on.
Below is the verbatim transcript of Dhiraj Sachdev’s interview to Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Sonia: We have seen more than USD 1 billion of funds flow into emerging market in the recent past. The momentum is pretty good. Would you go with the flow on the upside or would you start to get a bit concerned about valuations at these levels?
A: To give a market perspective, we are still in the early stage of very powerful and structural bull market. The reasons are plenty from favourable monsoons, which is expected to drive consumption demand to government's thrust on reforms and capex especially on the infrastructure side be it roads, railways or highways to positive real interest rates as well as the fact that corporate earnings are expected to recover. We are already seeing a reflection of margin expansion happening on the corporate side.
Besides the macro indicators are also fairly favourable be it stable rupee or stable inflation, lower current account deficit, rising tax revenues etc. So, while there is a structural shift happening in the domestic savers in favour of equities and also 40 percent of developed markets, sovereign bond being negative yielding, which is chasing emerging markets I don’t think or it is unfair to call this market as just purely liquidity driven. Liquidity chases good fundamentals in pursuit of higher returns and that is what is happening.
Let us take for example in real estate we saw in last 10-12 years of very super cycle when the real estate prices rallied and nobody complained there that it is liquidity driven rally. In fact, real estate asset class was more mortgage driven where the liquidity was infused because mortgage finance was available to the home buyers. However, nobody complained that real estate rally is liquidity driven just because real estate property prices are not listed on the exchange.
So, we should not shrug this equity market rally off by just saying that this is a liquidity driven rally. Of course, corrections will be part and parcel of the market, but if I have to define the character of corrections in this bull market, it is going to be sharp swift and short-lived and should be bought into.
To add to the point is that valuations are still favourable; we are still in the early stages of an up cycle in the earnings side. The peak of the earning cycle is still far away, so I don’t thing valuations are scary at this point of time.
Anuj: If I look at some of your funds you are overweight on both industrials and consumer staples. Both have done well of course consumer staples now very expensive, industrials you might still say that there is a lot of value left there in terms of valuation but what explains the overweight stance on both the sectors?
A: It is very stock specific, so wherever in consumer staples we felt that the valuations are relatively attractive to the sector per se or to other companies that is the position that we have taken into account. However, by and large we have positioned ourselves across many other segments be it agro chemicals, specialty chemicals, non banking finance companies (NBFCs) for example be it on the home mortgage financing business or gold mortgage finance business, stock broking business or print media, cement and home textiles. So, we are fairly diversified as far as fund positioning is concerned.
Anuj: On that NBFC point itself, are things getting out of hand? We have seen a huge rally for example Manappuram Finance one of your stocks is a 5 bagger over the last six months or so and couple of other stocks have also rallied a lot. Do you think this is a wrong way of looking at some of these stocks, the kind of rally that they had?
A: Again NBFC business models are very different and it will be wrong to categorise them in one basket. Within the NBFCs pack you have auto finance companies, consumer finance companies, gold mortgage companies, home finance companies, micro finance companies etc. So, may be here and there one company may be expensive, may be on the consumer finance side. However, if you look at the fact that over the next three to five years they can still grow their lending book in the same prices that they have done in the past, it can still offer returns to the shareholders.
Our perspective is that we still find valuation is attractive on the home finance side and gold mortgage finance business as such from their growth perspective. Specifically, on gold mortgage finance business, their penetration is still very low at just 3 percent so there is lot of room to grow besides the penetration is increasing after the Jan-Dhan Yojana scheme.
The companies per se have launch shorter duration products, which means they are not subjected to gold price fluctuation as such. Our sense is that these companies in the organised sector have domain expertise and well connectivity, so there is a competitive advantage out there. So, we are not worried at sub 2 times adjusted book value in terms of valuations for these companies.
Sonia: You also have exposure to a lot of the economy facing infrastructure companies the likes of IRB Infrastructure, Adani Transmission, some of these monsoons related companies like VST Tillers etc. These are stocks that have perhaps given good returns in anticipation of good monsoons etc, but do you still see meaningful returns from some of these infrastructure players?
A: Infrastructure is a long hold; the fact is that government thrust on infrastructure continues. So, it augurs well for many of these companies though private capex is still and yet to happen. We believe we are fairly encouraged by lower reductions in stalled projects as well as rising order book on many of these companies.
The only problem that happened in the past was the working capital issues in many of these companies. So, one has to be very selective out here and that is how we have positioned ourselves.
Anuj: No IT stocks in your funds at least in top holdings, what explains that call?
A: In midcap fund, except for one, we don’t own many of the IT companies. We are underweight given the fact that there is general slowdown in the IT sector per se. So, we own many other companies or sectors which include agro chemicals and specialty chemicals.
Anuj: The other one that stands out for me is your exposure to oil marketing companies. You have the big ones Hindustan Petroleum Corporation (HPCL) and Indian Oil Corporation (IOC) but you don’t have exposure to upstream companies?
A: Relative valuations in oil marketing companies is still cheaper because of steady marketing margins. Though we believe that the refining margins have peaked out and may not sustain at the same pace as we may see in the current quarter. It is just that the relative valuations are attractive compared to the rest of the market speaks for our ownership in the oil marketing companies.