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DAILY VOICE | The second leg of current bull market likely to be driven by expansion of earnings: Hiren Ved of Alchemy Capital

Mid-caps and small-caps are the most geared to economic recovery. This is the reason why they have underperformed in the last 3-4 years as growth was missing, says Ved.

March 12, 2021 / 04:39 PM IST

Hiren Ved, Director, CEO, and CIO of Alchemy Capital Management, said the first leg of the current bull market has been driven by the re-rating of valuation multiples. The second leg is likely to be driven by expansion of earnings, he added.

Ved, who has 3 decades of experience in the capital market, believes midcaps and smallcaps are most geared to economic recovery and in the current scenario, they expect broader markets to continue to do well.

From the broader market, he likes stocks such as IEX, Varun Beverages, AU Small Finance Bank, Crompton Consumer, L&T Technology and JK Cement.

Here are edited excerpts from his interview with Moneycontrol’s Kshitij Anand:

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Q) Indian equities seem to be in a firm bull market if we look at the micro and macro data for February. But, weak global cues could be a spoiler in short term. What would you advise investors?

A) We are of the view that India is at the cusp of a new growth cycle. There is a clear impetus by the government on manufacturing (via PLI schemes), cost of capital has come down in a meaningful way after a long time and the health of the financial system has turned out to be far better than what was feared.

Also, the government has budgeted to increase its CAPEX spending to 2.6% of GDP in FY22, which is the highest level in 15 years. All this points to a sustainable economic recovery.

The first leg of this bull market has been driven by the re-rating of valuation multiples. The second leg is likely to be driven by the expansion of earnings.

For instance, in Q3, Nifty companies have reported 21percent YoY profit growth and are likely to report a decadal high 15%+ EPS growth in FY21.

We think FY21-FY23 EPS CAGR of 25 percent is quite achievable, which is positive for the markets. Of course, there can be intermittent periods of corrections due to global factors, but from a medium to the longer-term horizon, we remain optimistic on the markets. And, any dip would be a good opportunity to buy.

Q) What is happening with commodities? Crude seems to be inching higher, we are seeing some action in metals as well. Do you think we are entering the Commodity supercycle for the first time since 2008?

A) If we look at the last decade, most of the heavy lifting to support growth was done by the monetary policy. This is because the GFC posed a significant threat to financial stability and hence monetary policy had to be at the forefront.

On the other hand, with monetary policy reaching its limits, the COVID pandemic has induced a greater fiscal response. There has been a massive rise in government spending all over the world, particularly in the US.

In India too, the central govt spending is budgeted to rise by 28 percent on a YoY in FY21 and CAPEX spending is budgeted to rise by 30 percent YoY in FY22.


Generally, fiscal spending tends to have a stronger impact on the real economy while monetary policy has a bigger impact on the financial economy.


We believe that stronger fiscal spending will lead to a more commodity-intensive economic growth, which coupled with structural under-investment in the old economy (on the supply side) in the last 5-6 years should help the commodity cycle.


Q) Gold also seems to be inching towards a bear market (a fall of 20% from the highs). What are your views, and what should investors do with the yellow metal – the right time to deploy the money?

A) Gold is viewed as a safe-haven asset and hence it did well last year as the world went into turmoil due to the pandemic. However, a couple of things have worked against gold this year.

Firstly, investor interest seems to have shifted from Gold to Bitcoin as an alternative asset class. Today’s generation, whom we call millennials, is  very open to cryptocurrencies and digital payments in general versus the older generation, which would have preferred physical gold.

Secondly, as global bond yields have risen, gold prices have corrected. Overall, we do not think that gold is likely to deliver outsized returns, and investors at best can hold gold for portfolio diversification given its safe-haven nature.

Q) What is powering the rally in the small & midcaps space?

A) Midcaps and smallcaps are most geared to economic recovery. This is the reason why they have underperformed in the last 3-4 years as growth was missing.

In fact, the markets had become extremely narrow and most investors were only looking at 10-20 companies that were delivering superior growth.

However, our view now is that we are in the midst of a broad-based earnings upgrade cycle driven by low-interest rates, government push on capex, PLI outlays, China+1 FDI incentivising manufacturing, and improving capacity utilization (which will lead to operating leverage). In such an environment, we expect broader markets to continue to do well.

Hiren Ved Insta

Q) How are foreign investors viewing India especially after the rise in US Bond Yields?

A) The rise in US bond yields has been on the back of a stronger-than-expected economic recovery which in itself is not a bad sign. As long as the rise in bond yields is orderly and against a background of strong growth and moderate inflation, we believe equities should do well.

If you look at the global macro set-up, the US dollar has been weakening and commodities have been doing well. This in general bodes very well for EM equities.


If EM equities do well, India will get its fair share of passive flows. Also, the post-pandemic cyclical rebound is expected to be the strongest for India within the EM basket.


This along with a continuing focus of the govt on structural reforms like privatization, bad bank, manufacturing push, etc is likely to be viewed quite favourably by FIIs.


Q) Where is smart money moving especially in the last few weeks – global setup has changed a bit, and on the domestic front strong micro and macro data does suggest economic and earnings recovery in the offing?


A) Smart money has been moving towards digital and cyclical plays. Digitization is a multi-year mega trend that has got accelerated as a result of the Covid-19 pandemic.


To give a few examples, the share of UPI in merchant transactions has doubled to 30 percent in FY21 YTD from 15 percent in FY20. In fact, one can now go anywhere without cash as long as one has a smartphone and not get inconvenienced.


Similarly, we had Mr. Gopinathan of TCS commenting that the industry is in the midst of a multi-year technology transformation cycle as more and more companies digitize and move to the cloud.


Overall, we believe that the digital theme has immense potential. The only thing one needs to be cognizant of in this space is that technology by nature is disruptive and therefore one should invest in those digital plays where one has the confidence on the management’s ability to continuously evolve and keep abreast with the changing technology.


Q) A lot of beaten-down stocks are beginning to get buyer's attention. Any Dark Horses which investors can look at and why?

A) Our view is that there will be strong recovery in cyclical and structural sectors of the economy. However, what led in the last cycle need not necessarily lead in the next and similarly, what did bad in last cycle may not be the worst in next.

A lot of stocks in sectors which didn’t do well for eg. capital goods, metals, infrastructure, materials, etc. could do well. However, one thing will never change – the quality of earnings and the quality of governance.

We have to be careful about these two factors – just going after beaten down names is not going to be very fruitful.

Q) Amid the privatization buzz – what should investors do with the PSU space?

A) It does seem that the government is pretty determined to go through with privatisation of PSUs. Prime Minister Modi’s recent comments that the government has “no business to be in business” sends out a very strong signal.

Historically, a lot of these PSU companies are not that efficient and have not been at the forefront of growth.

With private players coming in and turning around the business in terms of efficiency, profitability could improve and hence the valuation. In fact, even if we can get one big-ticket disinvestment like BPCL completed soon, it could lead to further re-rating of the entire PSU pack, despite the recent run-up.

However, we would not recommend investors to buy a particular PSU just because it is up for sale.

One should be selective in this space and should look at those public enterprises which are sector leaders or have not lost market share and which are relatively better managed. The other alternative is to buy a basket of PSU’s through an ETF.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Kshitij Anand is the Editor Markets at Moneycontrol.

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