Shyamsunder Bhat, who has 26 years of experience in the capital market, is of the view that the number of listed companies in the internet space, in general, are limited as regards to the Indian equity market.
Bhat is CIO at Exide Life Insurance.
Financial services, including fintech, companies could be wealth-creators over the next decade, he said said in an interview with Moneycontrol’s Kshitij Anand. He suggested companies from the manufacturing space, particularly the sectors that could benefit from the Production Linked Incentive scheme, are also potential wealth-creators
Here are edited excerpts from that interview:
Q) The market is going through some consolidation, but do you think the bigger story is still intact and it is still a good buy on the dips market?
A) Yes, the longer-term outlook for our equity market has now become more positive than before. We had been cautious on the markets in the past few months as the rally had been primarily a liquidity-driven one.
However, two factors make us more positive than our earlier stance.
First, the number of recent earnings upgrades has been among the highest in recent years, and second (and a bigger longer-term driver and the primary reason for our change in the stance) has been the recent Budget.
The revival in retail consumption, as well as industrial activity, has been stronger than anticipated, and an accelerated vaccination to address the pandemic could help to strengthen this trend.
By not increasing taxation at the corporate and individual levels (except for some minor changes), by increasing the capital expenditure, and by announcing a glide-path of a fiscal deficit of 4.5% only by Fy25-26, the Government has effectively indicated its focus on growth through borrowings for not just Fy21-22 but for another 3 years.
An environment to foster growth is therefore now in place, which augurs well for equity markets over the next few years.
While near-term valuations had been (and still remain) a concern that could cause intermittent dips, the recent developments have introduced the much-needed fundamental reasons to be more positive on the market.
Q) It is well-known fact that the market discounts everything in advance and this it might have discounted a lot. Do you think with growth catching up – the market could not take a breather and let numbers do the talking before resuming its uptrend journey?
A) Equity markets indeed discount future expectations and have fully discounted the next year (FY21-22) earnings. At 18-19 times Fy22-23 earnings, the Nifty-50 has also partly discounted the 2-year forward earnings, as this is above the historical range.
Therefore, we could see some consolidation in terms of the Nifty 50, to allow time for corporates to demonstrate further earnings growth (since earnings expectations for the Nifty 50 have disappointed in the past few years).However, we could continue to see sectoral shifts on the basis of relative valuations, and stock-specific shifts based on the delivery (or non-delivery) of earnings over the next few quarters.
The second wave of COVID infections domestically, and smaller inflows (or large outflows) from FIIs, if witnessed later during the year, could pose larger risks for the market. Else, the market could remain supported, with smaller corrections.
Q) There is a lot of buzz in the financial services space on account of privatisation or merger of NBFCs. How should one play the financial space post Budget 2021?
A) We are positive on the overall financial services sector, which is our largest sectoral holding in the portfolio.
This sector had underperformed in the initial part of the up move in the markets but had gradually caught up in the few months prior to the Budget, before rallying sharply post the Budget.
Within the sector, we have a broad-based exposure across banks (largely private sector) and housing finance, with some exposure to select NBFCs and insurers.
The Budget has announced the intention to privatise 2 PSU banks and 1 general insurance company, along with an increase in FDI in the insurance sector to 74% (post the proposed amendments to the Insurance Act).
We intend to continue playing the financial space as a blended portfolio across the various sub-sectors as mentioned above, rather than on the basis of any privatisations/mergers as these could be events that could be speculative in terms of stocks or timelines.
Q) 7 consecutive months of outflows from the equity MF scheme tell a story that investors would like to take things in their own hands especially the ones who can take risks while the risk-averse ones continue to follow the SIP route. What are your views?
A) The outflows from equity MF schemes over the past few months could be due to various reasons: direct equity investing by retail investors, personal liquidity needs; and allocation to other asset classes like real estate.
A large number of new retail investors are now investing directly in the equity markets, as per media reports.
This could have been a function of a re-allocation of time while working from home during the lockdown, some disappointments in the absolute performance of mutual fund schemes over the past few years, and early success in terms of initial investments during market lows in March/April last year paying off significantly due to a largely unidirectional up move in the markets since then.
Personal liquidity needs may also have arisen due to workplace-related issues, such as pay-cuts or job-losses.
In recent months, a revival in the demand for real-estate could also be possibly indicative of some re-allocation of investments, with drivers like tax concessions and low interest rates.
However, at higher valuation levels, risks associated with direct equity investing have increased, and we could gradually see a resumption in investor inflows in equity mutual funds and ULIPs.
Q) We have seen a lot of digitization taking place in every sector amid the outbreak of COVID last year. Can Internet-based companies, insurers turn out to be the next wealth creators of this decade? What are your views – if not, which sectors are you eyeing?
A) We have seen spend and usage of technology accelerating across sectors during 2020. From the perspective of the insurance sector too, this period has aided the adaptation of policyholders to the digital mode of paying their premia as well as for addressal of queries.
Presently, the number of listed companies in the internet space, in general, is limited as regards the Indian equity market. However financial services including fintech companies could indeed witness wealth creation over the next decade.
In terms of other potential wealth-creators, we could also witness companies from the manufacturing space particularly from sectors that could benefit from the Production Linked Incentive schemes announced by the Government.
We need to see new sectors where we have the scale and the cost-competitiveness to be major players on the global front.
Initial beneficiaries are from the consumer electronics space; it remains to be seen as to whether we witness traction in some of the other sectors like auto and pharma as well.
Select companies from the commodity space could also gain from the spending on infrastructure in some of the developed countries looking to revive growth, as well as in India. Such companies generally trade at lower multiples due to the cyclicality of their businesses but could see extended periods of re-rating.
Q) The year 2020 saw many good ticket IPOs and the story for the primary market still remains strong in 2021. Can we call it a frenzy amid the abundant liquidity in the system? It looks like whatever you throw at D-Street everything will get absorbed. What is the kind of money your see getting raised in 2021?
A) There have been some good quality IPOs in 2020, and we have witnessed manifold gains for the investors who were allotted shares in these primary issuances.
There is the likelihood of a much larger pipeline of IPOs in 2021. While liquidity is abundant, each IPO would need to be examined in terms of the quality and upside potential, particularly as there could be a tendency by investment bankers or promoters to price their issuances at a significant premium, encouraged by this liquidity, overall market valuations and the performances of recent IPOs.
Q) In the market it is always about the future. How should one plan a portfolio for a post-COVID environment?
A) Age and risk-appetite would continue to be key factors to consider while allocating assets. However, is interesting to look at the performance of asset classes as of now.
For the past 10 years, the returns from the Crisil Bond Index are broadly similar to those from the Nifty 50. In particular, for the past 3 years as of January 2021, the returns from the Crisil Bond Index are well above that from the Nifty 50, and this is despite the doubling of market levels from the March lows.
This relative performance of asset classes is a reflection of stagnation in the profits of the constituents of the Nifty 50 in the past few years, as well as the capital appreciation on bond portfolios due to the fall in interest rates.
Going forward, we could see a change in both of the above. Corporate profit growth is poised to grow strongly over the next 2 years, while the elevated levels of Government borrowings over the next 3 years could result in interest rates rising; a part of this move in interest rates has already been witnessed in the past few weeks after the recent Budget.
Therefore, going forward, we could see better relative returns from equity funds as an asset class as compared to bond funds.
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