DAILY VOICE: Markets may not rise in tandem with earnings growth in expansion phase: Tushar Pradhan of HSBC Asset Management

Tushar Pradhan: It is well known that the markets tend to revert to the mean. Over time averages dominate expected returns for asset classes even if markets may deviate from this long-term average in shorter durations.

In the restoration phase of an economy where it tries to regain the level of economic activity to pre-crisis levels, the valuations discount future earnings growth leading to valuation multiples expanding beyond longer-term averages.

However, as the earnings come through in the expansion phase following such a restoration phase, multiple actually de-rate.

On an absolute level markets may not rise in tandem with earnings growth in the expansion phase to correct for higher market returns when earnings are yet recovering in the restoration phase.

Thus, the market may yet offer positive returns but in most cases will not match returns observed in the restoration phase even if earnings growth is indeed delivered.

Q) We are in a bull run, but given the way Sensex, and Nifty is defying gravity – does it make you cautious?

Tushar Pradhan: It is always necessary to stay invested in bull and bear markets as a longer-term equity investor will always ride the intermittent volatility in the pursuit of average asset class returns.

If we speak of being cautious it should not reflect in making speculative decisions about the market level or direction. It is always prudent to remain diversified in one’s asset allocation and given one’s propensity to sustain volatility and in line with one’s financial goal remain adequately invested in all times across a range of asset classes.

Allocative changes can be made in case the risk profile demands it. But this cannot be a rule for all investors. Each situation and each investor needs to evaluate this at an individual level.

Q) After strong March numbers, June has been a mixed bag for India Inc. What are your earnings estimates for FY22 and FY23?

Tushar Pradhan: Consensus earnings estimates continue to remain robust for the next financial year. This is on the back of expected bounce back in economic activity and strong corporate results.

Q) Midcaps of today could become Nifty constitutes tomorrow. Do you think the outperformance of small & midcaps is here to stay even though we have seen a sharp rally and both indices are now trading at a premium to Nifty?

Tushar Pradhan: From an earnings growth perspective smaller companies are expected to see stronger earnings growth compared to larger-cap companies as a result of the base effect.

This may make returns appear outsized in smaller cap companies, however, if the earnings sustain, PEG multiples will be comparable. Higher earnings growth is rewarded by higher multiples.

Q) Which sectors/themes are looking attractive according to you now?

Tushar Pradhan: We are optimistic about a host of sectors that are likely to lead economic recovery in the coming quarters.

However, we also believe that the Indian economy is multi-faceted and one should incorporate the growth of non-traditional businesses in the scenario.

New age businesses, supply chain beneficiaries, select financials, IT and industrials look attractive at this time.

Q) For how long do you think RBI will be able to keep low interest rates? Do you see a hike in this financial year?

Tushar Pradhan: The narrative is focusing on growth and supporting the same through prudent measures. This would ensure that there may not be any untoward shocks to the ongoing economic growth.

This should entail a more nuanced and balanced view on interest rates. While maintaining adequate liquidity to fund growth, there is an emphasis to rein in inflation and provide for a smooth monetary landscape.

Q) How are foreign investors (FIIs) looking at India? We have been able to outperform most of the Emerging markets so far in the year 2021?

Tushar Pradhan: The global investment landscape continues to remain challenging for the rest of the year. Concerns about the sustenance of growth in the US and in developed economies is the single largest worry at the moment.

Global asset allocators are looking toward emerging markets as a means to diversify these risks. India has seen significant FPI inflows for the past few years and should continue to remain a bright spot for investors given the strong growth outlook, supportive monetary and fiscal climate and a domestic economy poised for a generational shift.

Q) What is your take on the new age businesses getting listed on D-Street?

Tushar Pradhan: The jury is indeed out on the future of these businesses. While one cannot predict the future of specific enterprises, it is very clear is that India is a nation on the move.

A move from traditional forms of capital allocation to newer marketplaces and increased participation in the same. Once dominated by archaic systems that distributed scare capital, newer businesses are accessing capital at rate that is unheard of.

A large mass of consumers is accessing newer products through e-commerce.  This being an irreversible trend is likely to spawn newer businesses that will change the economic landscape much like what has happened in emerging markets elsewhere in different areas.

This will be the time for India to take center stage given its unique positioning and demographic features. Combined with the connectivity through e-channels, it promises to make the next decade a memorable one for India and its citizens.

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